Annual urban inflation surged to 13.4% in February, up from 11.9% in January, according to the latest Capmas data seen by EnterpriseAM. The reading, which preceded the full impact of the regional conflict that erupted in late February, has prompted analysts to forecast a definitive pause — and potentially a reversal — of the Central Bank of Egypt’s monetary easing cycle. Prices climbed 2.8% m-o-m, a sharp acceleration from the 1.2% seen in January.

Behind the jump: This uptick was primarily fueled by a 4.6% y-o-y and 2.8% m-o-m increase in food and non-alcoholic beverages prices, and a 15.7% y-o-y and 3.2% m-o-m uptick in alcoholic beverages, tobacco, and narcotics prices.

The figure came in above expectations: “February’s inflation came higher than our estimate of 12.0% y-o-y and 1.5% m-o-m, and higher than the Reuters poll’s median estimate of 12.0% y-o-y,” HC’s Heba Monir told EnterpriseAM. Thndr’s Esraa Ahmed noted that while pressures were anticipated, the magnitude was unexpected, adding that the jump in education prices also pushed the headline figure up.

Annual core inflation — which excludes volatile items like food and fuel — jumped to 12.7% in February, up from 11.2% the month before. Monthly core inflation rose to 3%, almost double the 1.6% seen in January.

All this came before the outbreak of the regional conflict on 28 February, which has since pushed the EGP down nearly 8.4% against the USD amid sharp hot money outflows and increased import demand.

Where is inflation heading for the months to come? “Given the heightened geopolitical tensions and their notable spillover effects, particularly on energy and rising import costs, we believe short-term inflationary pressures are skewed to the upside,” Beltone’s Ahmed Hafez tells us. “We estimate the monthly momentum could further accelerate to c. 3% in March on the back of the petroleum product price hikes, and as lead indicators suggest a continuation of higher food prices, which could see annual headline inflation rebound to a 9-month high of 14.9%,” he added.

Adding pressure: The government implemented an earlier-than-planned fuel price hike this week after global oil prices saw extreme fluctuations in response to regional escalations. This hike is expected to push March and April’s inflation readings higher as it filters through the economy. A favorable base effect may keep the annual figure “within a reasonable range,” HC’s Neamat Choukri anticipates.

Speaking of the hike, it is expected to generate EGP 40 bn in savings by the end of June and a combined EGP 80-100 bn annually, a government source told us, noting that without the hike, the oil subsidy bill would have ballooned to over EGP 110 bn, far exceeding the budgeted EGP 75 bn.

And while we’re on the topic of subsidies: A government source in the electricity sector told us that officials are mulling two scenarios in response to rising prices — a 10-15% price hike for the highest consumption brackets or keeping prices as they are until the end of the fiscal year.

What can we expect from the CBE? Those we spoke to expect a wait-and-see approach at the next Monetary Policy Committee meeting in April. “The central bank is expected to keep the rate unchanged […] and monitor the impact of fuel price hikes on inflation, particularly if oil prices decline quickly and the conflict lasts only a few more days,” London-based economist Ali Metwally tells us. Thndr’s Ahmed agreed, noting that “merely pausing the monetary easing cycle effectively constitutes a form of tightening” and highlighting that the CBE's comfortable real interest rate margin provides flexibility for now.

The risk of a hike: Metwally cautioned that an immediate hike would be “costly for economic growth,” but warned that if the shock evolves into a broader inflationary wave while FX pressure persists, “tightening could become more likely.” For now, the CBE is expected to rely on other tools, such as liquidity management and market expectations management, to stabilize conditions and mitigate shocks, he added.

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