Egypt Inflation Rate Drops as Currency Float Shock Eases

Egypt’s monthly urban inflation rate fell for the first time in more than two years as the impact of lifting currency controls eased.

The month-on-month inflation rate came in at minus 0.2 percent in December, its lowest rate since November 2015, while the annual inflation rate eased to 21.9 percent from 26 percent the previous month, according to the state-run statistics agency CAPMAS. Annual prices were affected by a slowing of the increase in food and beverage prices, which make up the largest single component of the basket of goods and services. Annual food and beverage prices rose by 25.2 percent in December compared to 32.3 percent the previous month.

“The stability of prices on a monthly basis makes sense: any further increases would affect demand,” said Radwa El-Swaify, head of research at Cairo-based Pharos Holding. Holiday promotions and discounts may have helped push food prices down, El-Swaify added.

Annual core inflation eased to 19.86 percent in December, according to the central bank, compared to 25.54 percent the previous month. The increase was the slowest since October 2016, according to data compiled by Bloomberg. Month-on-month, core inflation declined by 0.37 percent in December compared to an increase by 1.31 percent in November, the regulator said.
Decelerated inflation is sorely needed in Egypt, where prices soared following the central bank’s November 2016 decision to float the pound to end a foreign exchange shortage that had crippled business activity. The move helped Egypt to finalize a $12 billion International Monetary Fund loan that in turn, boosted investor confidence and drew in foreign funds.

The reforms, which included fuel price hikes and increased taxes, also fueled inflation however. About half of the country’s 95 million residents live on or near the poverty line, and an easing of prices could help President Abdel-Fattah El-Sisi defend the measures ahead of presidential elections set for March.

The central bank has made it a priority to keep a lid on price rises. It has held the benchmark interest rate unchanged at 18.75 percent since July, though with inflation easing, some economists are now expecting a cut before the end of the first quarter. The IMF in December lauded the government’s reform program, but urged the central bank to be ready to take action if slowing inflation heats up.