Egypt, Inflation Surprise will lead to another rate hike !

• August CPI Above Estimate: Consumer price inflation rose to 23.6% YoY in August, up from 22% YoY in July, and well above our estimate of 21.5% YoY. The rise was driven by increases in both food and non-food items, such as furniture and clothing, ahead of Ramadan, which began on 1 September. We had expected that Ramadan food price increases would be minimal this year because of a series of food price rises since January.
• Further Price Rises Ahead: We expect to see further changes in non-food prices over the next few months. Tobacco prices rose in September 2008, and the new school year should see education costs in the CPI rising sharply. Hotel prices have also been increased recently, and this should show up in the CPI in the next few months. We believe that the deflationary effect of falling global food prices will limited in the short-term.
• Peaking at 25% in December: We have revised our inflation forecast, and see inflation peaking at just over 25% in December 2008. We still expect that inflation will fall in 1H2009, largely due to base effects, but we now expect inflation to remain in low double digits well into 2010. We believe that inflation expectations have changed over the past five years thanks to a series of inflation spikes, and see the longer term inflation trend around 10%.
• CBE to Raise Rates Next Week: We expect the Central Bank of Egypt’s Monetary Policy Committee (MPC) to raise rates by 50 basis points (bps) on 18 September, bringing the overnight deposit rate to 11.5%. We now also expect a further increase in policy rates, bringing the ON deposit rate to 12%, on 6 November, after which we expect the MPC to pause tightening. EFG-Hermes, Bloomberg