The decline in Egypt’s annual headline CPI number for February was exceptionally large at over 12pp, but it did not really tell us anything that we did not already know.
Monthly data had long indicated that inflationary pressures had moderated since the unification of the FX market in March of last year, and the fall in February inflation was widely anticipated by economists, market participants and the Central Bank of Egypt, especially as it was almost entirely driven by the arithmetic base effect produced by a surge in prices a year earlier.
And yet the publication of this data point earlier this month is now widely seen as paving the way for the cutting cycle to commence, with consensus expectations calling for a rate cut in April’s MPC meeting, having consistently forecast a hold for each meeting since the CBE hiked rates last March.
We see various possible reasons for why the CBE has been reluctant to lower rates in the absence of confirmatory data, despite well-grounded expectations, including:
Whatever the reason, in our view the decline in February inflation underscores what we have been arguing since last May: that the monetary stance in Egypt is excessively restrictive, and that a timely normalisation in the rate environment is needed to reduce economic and fiscal headwinds.
Exhibit 1 plots the average ex ante and ex post real rate for Egypt.1 The ex ante real rate is calculated by deflating the prevailing nominal rate with our measure of one-year-ahead inflation expectations, which is based on consensus economic forecasts. The ex post real rate, by contrast, is calculated by deflating nominal rates with the realised inflation rate after the fact. Ex ante rates are thus forward-looking estimates of the expected real cost of borrowing over the coming year, while ex post real rates are a backward-looking observation of the realised real cost of borrowing over the past year.
