Egypt inflation accelerates in May

Egyptian CPI inflation ticked up to 4.8% y/y in May, compared to 4.1% the previous month. This was the fastest pace since December. On a monthly basis, CPI growth was 0.7%, moderately slower than the 0.9% the previous month, but food prices accelerated at 1.7% m/m compared to 1.5% in April. The fairly sharp pick-up in inflation leads us to the conclusion that the CBE’s rate-cutting cycle has likely now reached its end, and we anticipate that the overnight deposit rate will be kept on hold at 8.25% through the remainder of the year. The next MPC meeting is scheduled for next Thursday, the day after the FOMC. Given the global price pressures we would expect the CBE to err on the side of caution even if the Fed’s language remains especially dovish.

Egypt CPI inflation, % y/y

Source: Bloomberg, Emirates NBD Research

While the latest inflation print leaves Egyptian real rates fairly robust when compared to many of its peers, we believe that the CBE will wish to retain this attractiveness in an environment where discussion has focused on the global reflation trade and its potential implications for emerging markets. Many global price pressures remain in play, with high costs for shipping and commodities unlikely to dissipate over the next several months, even if they do ultimately prove to be as transitory as developed market central bankers insist they will be. We have already seen this in play in the local economy, as the PMI survey for May showed input prices rising at the fastest pace since September 2019, in part due to higher prices for raw materials.

Foreign holdings of Egyptian debt, USDbn

Source: Bloomberg, Haver Analytics, Emirates NBD Research

Accelerating inflation in the rest of the world will also be watched closely by the CBE, and specifically the risk this poses of sooner-than-signposted tightening of monetary policy by the Fed and other DM central banks. Inflation in the US and Eurozone has surged, and while yields on 10-year USTs have slipped back down below 1.5% ahead of the latest inflation print there, the concern will remain that a change in stance could prompt a repeat of the 2013 taper tantrum and rapidly rising yields, making many EM bonds less attractive. Foreign holdings of Egyptian treasury bills had recovered to USD 20.9bn by April, but the outflow seen during the pandemic crisis, when the total slipped to USD 7.1bn, illustrates how quickly this can change.