Egypt's urban inflation drops to 8.4 pct in July, lowest in a year

Egypt's annual urban consumer inflation dropped to 8.4 percent in July from 11.4 percent in June, the official statistics agency said on Monday.

The inflation reading is the lowest since June 2014, the month before the government slashed energy subsidies and implemented a sales tax on alcohol and cigarettes that drove up prices.

"The main driver of the deceleration is the fading away of the one-off impact of the fiscal consolidation measures of last year," said Mohamed Abu Basha, an economist at EFG Hermes.

"With administered price hikes no longer distorting inflation, and global commodity prices set to remain low, we think inflation is likely to remain in single digits for the next 18 months or so," Capital Economics said in a research note on Monday.

But a long-awaited value-added tax, if passed, could push inflation back into double digits and make interest rate reductions unlikely, said Abu Basha.

"The government said in its budget statement it is looking to implement the value-added tax this fiscal year ... [and] from the level of revenues they budgeted, it looks like they have to do it relatively early in the [fiscal] year," Abu Basha said.

Egypt's economy grew 3 percent in the third quarter of the 2014/2015 fiscal year, which ended in March. That was slower than the 5.6 percent recorded in the first half of the fiscal year. Egypt's 2015/2016 budget projects growth of 5 percent.