Inflation was flat in December — does that set up the next rate cut?

Annual urban inflation was unchanged at 12.3% in December, the same pace at which prices rose the month before. This came even as the price of food and beverages rose 1.5% year-on-year last month compared to 0.7% y-o-y in November, according to data from state statistics agency Capmas.

Beyond food, the data shows “not just deceleration in inflation rates, but outright deflation in durable prices, whether that is real estate or automobiles” as the Central Bank of Egypt’s interest rate policy helped choke inflation, Al Ahly Pharos Head of Research Hany Genena tells EnterpriseAM.

This structural cooling is being paired with a tactical government effort to manage food and beverage prices, which saw a paradoxical split this month. Although the annual food inflation figure ticked up to 1.5% y-o-y, the month-on-month change in prices was actually a drop of 0.7%. This was driven by a sharp reversal in poultry and egg prices, which Genena notes “do have a material impact on the index” and “cause swings in the inflation rate on a month-on-month and year-on-year basis.”

Why it matters: With inflation concerns now increasingly in the rearview mirror, the central bank should be emboldened to push ahead with its easing cycle — and give the Finance Ministry breathing room on its debt-service costs. Genena expects the central bank to cut rates by 200 bps when it next meets in mid-February, pointing to how “high interest rates are causing pressure on the Finance Ministry” and the need to address interest payments on debt, which effectively consumed over 96% of the state’s total budget between July to November with a EGP 1.06 tn bill.

What to watch for next: Policymakers will be closely watching January’s inflation reading, out early next month. Sahar Al Damati, the veteran banker and former chair of Banque Misr, told us last month that the bulk of imports for Ramadan was already accounted for, suggesting that the traditional inflationary impact of the holy month (set to start around 19 February) may already be priced-in.

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