Subsidy cuts to push inflation up in beginning of 2018/19: CE

CAIRO – 10 April 2018: Capital Economics expected the inflation to rise in the first one or two months of the upcoming fiscal year 2018/2019, with the government's intention to cut subsidies.

Egypt targets to cut subsidies on fuel and food by 26 percent to LE 89.1 billion and 5 percent to LE 86.17 billion, respectively, and it also aims to raise food subsidies by about 5 percent to LE 86.175 billion.

Capital Economics expected in a Tuesday report that further decline of the inflation would push the Monetary Policy Committee to cut the interest rates for the third time during its upcoming meeting in May.

The Central Agency for Public Mobilization and Statistics (CAPMAS) announced Tuesday the drop of the annual consumer price to 13.1 percent in March 2018.

On a monthly basis, inflation increased 1 percent in March to record 269.8 points, compared to 267 points in February, CAPMAS said.

The report clarified that the inflation recorded its lowest level in March since May 2016, meeting the central bank's target range of 13 percent (±3 percent) for the end of this year.

The Central Bank of Egypt (CBE) said in mid-March that it is targeting an inflation rate of 13 percent (±3 percent) in the fourth quarter of 2018, and to gradually reach a single digit rate next year.

The Egyptian government expected inflation to decline by the end of this fiscal year (FY) from 17 percent to 13 percent, according to Minister of Finance Amr el-Garhy.

Inflation has increased in Egypt since the flotation of the Egyptian pound in November 2016, reaching a high record level in July due to energy subsidy cuts; inflation has gradually eased since July 2017.

Capital Economics expected the overnight deposit rate to reach 13.75 percent by the end of this year, whereas the consensus expects it to fall to 14.25 percent.

The overnight rate and the overnight lending rate are currently at 16.75 percent and 17.75 percent, respectively.

The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) lowered the interest rates for the second time this year by 1 percent at the end of March.

In February, the MPC lowered the interest rates by 1 percent for the first time since the flotation of the Egyptian currency in November 2016 after inflation rates slowed down.