HC Securities & Investment said that the partial lifting of energy subsidies would contribute to monthly inflation rising to 3.5% in June and annual inflation reaching 14.5%, according to the investment bank’s estimates.
While numbers also point to monthly inflation of 1.5% in July on the back of a rise in electricity prices and second-round effects, annual inflation is expected to decelerate to 12.5% in July due to favourable base-year effects, according to HC.
HC Chief Economist Sara Saada said that HC believes the Central Bank of Egypt (CBE)’s Monetary Policy Committee (MPC) will likely keep interest rates unchanged at its upcoming meeting. The partial lifting of energy subsidies was a major event that has affected the market since the last MPC meeting, she noted.
With the signing of the International Monetary Fund (IMF)’s $12bn Extended Fund Facility (EFF) in November 2016, the government and the IMF have both been clear about the inevitability of the gradual lifting of fuel subsidies because of their negative repercussions on the state budget.
The government has since strived to restructure its expenditures and subsidy programmes, aspiring to provide subsidies strictly to lower-income brackets and increase the budget allocations dedicated to healthcare and educational services. Consequently, the recent decision to partially lift fuel subsidies was expected, even though the magnitude and expected implementation were not pre-announced, according to Saada.
“While we had expected the energy subsidy reforms to take effect in July instead of June, the gasoline and diesel price increases were in line with our expectations, largely mimicking last year’s average increase of 34%. We expect this increase to contribute to rising prices and accelerated inflation in the short term,” Saada added
It is worth noting that at its last meeting on 17 May 2018, the MPC kept its policy rates unchanged after two consecutive 100 bps cuts in February and March, signalling the start of an easing cycle.
The overnight deposit rate, the overnight lending rate, and the rate of the CBE’s main operation are each at 16.75%, 17.75%, and 17.25% respectively. The discount rate is at 17.25%.
Annual headline inflation decelerated to 11.4% in May from 13.1% in the previous month, with monthly prices increasing only 0.2% from 1.5% in April, according to data published by the Central Agency for Public Mobilisation and Statistics (CAPMAS). Annual core inflation marginally decelerated to 11.1% in May from 11.6% in the previous month, while monthly core inflation accelerated to 1.5% from 1.1% in April, data posted on the CBE’s website showed.