Excerpt from Central Bank of Egypt' press release:
Headline CPI declined by 0.16 percent (month-over-month) in May, from a 1.47 percent increase in April. In spite of the monthly decline, the annual rate increased to 8.20 percent from 8.11 percent recorded in April, given the unfavorable base effect. On the other hand, core CPI remained unchanged in May compared to 0.97 percent increase in April.
The favorable monthly developments in both headline and core inflation came on the back of declines in several food prices, despite sporadic increases in non-food prices. While the probability of a rebound in international food prices is less likely in light of recent global developments, the re-emergence of local supply bottlenecks and distortions in the distribution channels pose upside risks to the inflation outlook.
Meanwhile, real GDP grew by 2.4 percent in 2012/2013 H1, following a similarly feeble growth rate of 2.2 percent in 2011/2012. This nascent recovery in economic activity came on the back of tentative signs of recovery in the construction and tourism sectors.
Nonetheless, GDP growth remains to be partly suppressed by continuing weaknesses, albeit of lesser extent, in the manufacturing sector. In the meantime, given the heightened uncertainty that faced market participants since early 2011, investment levels remained low.
Looking ahead, the current political transformation may continue to have ramifications on both consumption as well as investment decisions, adversely weighing on key sectors within the economy. Moreover, downside risks continue to surround the global recovery on the back of challenges facing the Euro Area and the softening growth in emerging markets. These factors combined, pose downside risks to domestic GDP going forward.
While the slowdown in economic growth has been limiting upside risks to the inflation outlook, there are possible upward pressures on inflation going forward. Given the mixed balance of risks surrounding the inflation and GDP outlooks at this juncture, MPC judges that the current key CBE rates are appropriate.