Beltone Financial said July’s inflation reading confirmed its view that the June’s record low of 9.4%, despite its temporary nature, provided sufficient support for the expected inflationary pressures, which will have a strong impact on inflation readings during the second half of 2019.
Beltone indicated a possible 100bp cut in the interest rate at the Central Bank of Egypt’s (CBE) Monetary Policy Committee meeting on 22 August.
Egypt’s year-over-year (y-o-y) inflation slowed by 8.7% in July, down from Beltone’s forecast and June’s reading of 9.4%, as monthly inflation rose 1.8% versus expectations for a 2.5% rise and monthly inflation cut in May of 0.8%.
According to Beltone, the slowdown in the annual inflation reading was supported by a slight increase in food prices by 9%, compared to 10.3% in June, due to the monthly increase in food prices by 0.8%, which came in accordance with the investment bank’s expectations of a slight impact of high fuel prices on consumer goods.
Meanwhile, the housing, utilities, and transport sectors saw an increase of 9.8% and 8.7% y-o-y, reflecting the new 18% average increase in fuel and electricity prices at the beginning of July.
It added that although the two sectors are experiencing the highest increase on a monthly basis, their low CPI (3.3%) contributed to a slight rise in overall inflation on a monthly basis.
The catalysts from the comparative periods and the pound’s strength are expected to continue to support good annual inflation readings until the end of the year, which will keep inflation rates within the CBE target range at 9% (±3%) by the end of 2020, especially in the absence of factors affecting prices and inflation in next period. It pointed out that domestic fuel prices will be reviewed by the end of September 2019. It is also expected that prices will remain unchanged following the strength of the pound, in addition to the current decline in fuel prices below the budget price set at $67 a barrel.
Beltone believes that the US Federal Reserve’s rate cut by 0.25% to the 2-2.25% range on 31 July will support CBE’s resumption of its monetary easing policy. With regard to the second most important element of the interest rate decision.
Beltone expects treasury yields to remain attractive even after interest rate cuts, supported by a strong Egyptian pound and higher real interest rates due to slowing inflation.
It pointed out that among emerging markets with similar returns, Egypt is still characterised by improved macroeconomic indicators and GDP growth of +5%.