Egypt Price Drop for Second Month Boosts Rate Cut Chances

Updated on
  • Central bank governor has said rates will start easing ‘soon’
  • Curbing surging prices has been key challenge for government
An Egyptian soldier climbs the stairs outside of Egypt's central bank in Cairo, Egypt. Photographer: Shawn Baldwin

Consumer prices in Egypt fell for the second month in January, boosting the prospects of an interest-rate reduction even as the government pushes ahead with sweeping reforms expected to include more subsidy cuts.

The annual inflation rate in January in urban parts of Egypt eased to 17.1 percent from 21.9 percent, its lowest level since October 2016, according to data posted by the state-run statistics agency. Consumer prices on a month-on-month basis fell by 0.1 percent after having dropped 0.2 percent in December. Annual core inflation, a gauge stripping out volatile items such as food, slowed to 14.4 percent, according a central bank release.

The price drop bolstered central bank Governor Tarek Amer’s intention to cut rates “soon,” once officials are sure inflation is declining. He’s also factoring in another round of fuel price hikes planned in the next fiscal year that begins in July.

Radwa El-Swaify, head of research at Cairo-based Pharos Holding, expects the bank to hold its rates in its Feb. 15 meeting, but said the easing in prices in January was “very encouraging for a rate cut next week.” Any reduction then “will not be significant” because of the expected reductions in subsidies in the next fiscal year, El-Swaify said.

Major Challenge

Curbing soaring prices has been a major challenge for the government since its November 2016 decision to float the currency and raise fuel prices sent the urban inflation rate surging past 33 percent. The emerging downward trend offers bragging rights to President Abdel-Fattah El-Sisi, who is heading into elections in March that’s he’s widely expected to win.

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The International Monetary Fund, which had granted Egypt a $12 billion loan based on the government’s reform program, had emphasized the need to contain price increases.

“If this trend continues, Egypt will be able to achieve inflation of around 13 percent as early as June,” El-Swaify said. “We should start seeing a significant interest rate drop in the second half of the year.”

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