Ramadan Inflation Surprise Dims Egypt's Prospects for Rate Cuts
(Bloomberg) -- Egypt’s inflation accelerated even before expected fuel subsidy cuts go into effect, raising the likelihood that the central bank will take more time before reducing interest rates again.
Consumer prices rose an annual 14.1% last month from 13% in April, state-run statistics agency CAPMAS reported Monday. Despite government efforts to add extra food supplies into the marketplace ahead of the holy month of Ramadan, fruit costs led the surge in inflation, which more than doubled on a monthly basis to 1.1%.
While the increase may not prompt a rate increase, it also means the central bank “is likely to refrain from restarting its easing cycle,” Jason Tuvey, senior emerging-markets economist at Capital Economics, said in a note. “Policy makers will also want to await more details on upcoming subsidy cuts and assess the impact that they will have on inflation.”
Egypt’s central bank was on alert even before the latest wave of inflationary pressure materialized, leaving its key rate unchanged for a second meeting in May. Price growth remains well above its target range of 9%, plus or minus 3 percentage points, for end-2020. It has yet to set an inflation goal for the current year.
Annual core inflation, the gauge measured by the central bank that strips out volatile and regulated items, eased to 7.8% in May, compared with 8.1% the previous month. The slowdown is “clearly highlighting the stable inflation environment,” according to Cairo-based investment bank EFG Hermes.
A pickup in prices is eroding returns on Egyptian assets. The real yield on the government’s Treasury bills has fallen to about 3.2% from as high as 8% at the end of 2018. Still, in an era of diminishing or negative yields, the securities remain attractive to investors.
The Egyptian pound is the world’s second-best performer against the dollar so far this year. It traded 0.2% stronger versus the U.S. currency as of 2:23 p.m. in Cairo.
The uptick in consumer prices comes as the government is pushing ahead with a sweeping economic program aimed at boosting growth while cutting spending and its reliance on debt. Inflation has been a major hurdle for authorities after it spiked to well over 30% after the 2016 flotation of the pound.
The fuel subsidy cuts, which are expected at the end of June or early in the fiscal year that begins July 1, are a key part of the government’s push to cut costs. Allen Sandeep, director of research at Naeem brokerage in Cairo, said the inflationary impact of those increases “would depend on the extent of fuel price hikes and offsetting impacts of last year’s high base effects.”
Faster inflation, coupled with high rates, is squeezing businesses. After a brief period of growth, Egypt’s non-oil private sector activity contracted again in May. The Emirates NBD Purchasing Managers’ Index fell to 48.1 in May, its lowest since February and below the threshold of 50 that separates contraction from growth.
“In a bid to shore up demand, firms continued to discount, with output prices declining for the second month in a row,” Emirates NBD’s economist for the Middle East and North Africa, Daniel Marc Richards, said in a report. “Although the pace of growth in purchase costs has slowed in line with inflation, it will likely accelerate in the coming months as new subsidy reforms push up energy and fuel tariffs.”
--With assistance from Netty Ismail.
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