Inflation unexpectedly falls to 14.9% in June

Annual headline urban inflation fell to 14.9% in June, from 16.8% in May, ending an upward trend that extended over three consecutive months, according to data from state statistics agency Capmas. On a monthly basis, inflation fell by 0.1% compared to an increase of 1.9% in the previous month.

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Driving the trend: The decrease is mainly attributed to an easing in food and beverages prices — the largest component of the basket of goods and services used to calculate headline inflation — which rose 6.9% y-o-y in June, compared to 11.0% in May. On a monthly basis, food and beverages inflation dipped by 1.2%.

Fruit inflation saw a 64.9% y-o-y increase during the month, marking an acceleration from May’s 61.8% y-o-y jump. Electricity, gas and fuel materials also accelerated 38.1% y-o-y in June, compared to a y-o-y increase of 33.7% a month earlier.

Much weaker than anticipated: “June inflation came significantly lower than our estimate of 16.6% y-o-y and lower than Reuters' median poll estimates of 16.2% y-o-y,” HC Securities’ Heba Monir told EnterpriseAM, adding that Capmas data showed “a noticeable decline in the food and beverages segment versus our estimate of a 2.1% m-o-m increase.” Capital Economics’s James Swanston agreed with Monir, saying that “June’s outturn was much weaker than both we (16.0%) and the consensus (16.2%) had expected,” according to a research note seen by EnterpriseAM.

What about core inflation? Annual core inflation — which excludes volatile items like food and fuel — fell to 11.4% in June from 13.1% in May, according to data from the Central Bank of Egypt. On a monthly basis, core inflation fell 0.2% in June, compared to rising 1.6% in May.

Inflationary pressures eased amid regional de-escalation: “This decline is due to the absence of significant or sustained new inflationary pressures,” banking expert Mohamed Abdel Aal told us, adding “we maintain our view that inflation rate appears to be heading towards a downward trend, especially with concerns over increasing geopolitical tensions, particularly in the Middle East, having diminished following the Iran-Israel ceasefire.”

A pick up is expected ahead? “Inflation declined on an annual and monthly basis, but we are still anticipating an increase in electricity and gas prices among other items,” Ahly Pharos’ Head of Research Hany Genena told EnterpriseAM. This will come in addition to the impact of expected cigarette price hike due to the recently-approved VAT amendments, which will be reflected in July’s inflation figures, Genena noted.

Cooling inflation: What does it mean for the MPC's meeting today? The Central Bank of Egypt’s Monetary Policy Committee (MPC) is meeting today to review interest rates. Five of the experts we spoke to see the committee pausing its easing cycle today, while three others expect a cut between 100-175 bps. “I still lean towards holding interest rates steady,” Genena told us yesterday. The CBE has significant room to maneuver, if the MPC decides to cut rates this month, it will be by a maximum of 100 bps, Genena noted. “However, should no rate cuts occur this month, [the MPC] is expected to cut rates by 200 bps in August," Genena added. Abdel Aal reiterated his prediction of a cut ranging between 100-175 bps.

“Even before June’s downside surprise reading to inflation, we had pencilled in a 100 bps reduction in the CBE’s interest rates for Thursday’s meeting — of the 17 analysts polled, only seven (including ourselves) expect a cut, all of whom predict a 100 bps move,” Swanston wrote, predicting that the CBE is unlikely to make aggressive cuts today, given that “the headline inflation rate remains above the target range of 7 ±2% and the backdrop of Trump’s expiring tariff deadlines.” However, if disinflation accelerates as they expect, “chunkier moves are likely further down the line,” Swanston noted.

Outlooks for upcoming cuts ahead: Genena is forecasting a total of 400 bps in interest rate cuts during the remainder of the year, while Swanston foresees a “further 500 bps of reductions this year,” which he said “ is more dovish than other analysts expect.”