Inflation eased for the first time in 10 months in April thanks to a favorable base effect, the stabilization of the EGP-USD exchange rate, and a slight slowdown in food price growth. Figures released on Wednesday by state statistics agency Capmas showed that annual urban inflation decelerated to 30.6% y-o-y in April from 32.7% the month before. Monthly inflation also slipped to 1.7% in April from 2.7% the month before.

This was expected: The median forecast in a poll of economists by Reuters released on Monday saw inflation coming in at 31.0% in April. Last month’s reading also came in line with estimates by analysts at EFG Hermes Research and CI Capital Research.

Food inflation down from record high: Food and beverage prices — the largest component of the basket of goods and services used to calculate inflation — decelerated to 54.7% y-o-y in April, down from an all-time high of 62.9% in March.

Core inflation also weakened: Core inflation — often seen as a superior measure of price growth because it strips out volatile items such as food and fuel — slipped to 38.6% y-o-y from 39.5% in March, according to central bank data. On a monthly basis, core inflation weakened to 1.7% from 2.4% in March.

A temporary reprieve: Price hikes are expected to accelerate again as soon as this month due to the government’s recent decisions to hike the prices of diesel and subsidized commodities sold to ration card holders as well further currency weakness, EFG Hermes Research’s head of macroeconomic analysis, Mohamed Abu Basha, wrote yesterday. CI Capital is predicting inflation to “resume its upward trajectory over the coming months” to average of 30-32% in 1H 2023 “on the implementation of deeper fiscal reforms” including the diesel price hike and a potential increase in household electricity prices come the new fiscal year.

What happens to the EGP will be key: The widening gap between the value of the EGP on the parallel market and its official rate indicates that the central bank might opt for another devaluation, which would once again ramp up inflationary pressures, Bloomberg reports. The EGP has fallen to a new low against the greenback in the black market in recent days, with reports of the currency switching hands at 40.0 to the USD. The official exchange rate has remained unchanged since mid-March following three devaluations that have caused the EGP to more than halve in value against the greenback.

What does it mean for interest rates? Abu Basha expects April’s cooler inflation reading to give the central bank the chance to keep rates on hold at its next meeting on Thursday, 18 May. By contrast, CI Capital is penciling in 100-bps worth of hikes across the committee’s next two meetings. The CBE has raised interest rates by 1000 bps over the past year after delivering a jumbo 200-bps rate hike in March. CBE Governor Hassan Abdalla last month expressed doubts on the effectiveness of monetary policy to curb inflation, and said that policymakers need to be “very careful” about tightening policy further.

** We’ll be out with our customary interest rate poll on Sunday ahead of Thursday’s central bank meeting.

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