Egypt's inflation has fallen to some of its lowest levels in well over a decade, potentially triggering consultations with the International Monetary Fund under the conditions of a new $5.2 billion loan.
The trend also sharpens a dilemma for the central bank: whether to keep interest rates high to sell treasury bills and protect the currency, or lower them to encourage growth in an economy battered by the coronavirus pandemic.
Under a one-year, $5.2 billion Stand-By Arrangement signed with the IMF in June, Egypt committed to consult a technical team if inflation were to fall below 6% by end-September and the IMF board itself if year-on-year inflation falls below 4%.
Headline inflation slackened to 3.4% in August from 4.2% in July, near its slowest since 2005. Some economists expect the September figure, expected around October 10, to be similar.
If inflation falls too quickly, the IMF could argue that the central bank's monetary committee should consider lowering interest rates when it next meets on November 12, some economists said.
The central bank has been reluctant to reduce rates until it is sure dollar flows such as tourism, worker remittances and foreign purchases of Egyptian treasuries are once again stable, they added.
"I don't think they're comfortable cutting rates when the external balances are still under pressure. High real rates also keep the carry trade going," said Mohamed Abu Basha, an economist with EFG Hermes.
A IMF staff report last month did not define what period it would use to measure inflation or when any consultation might be held. Neither the IMF nor the central bank immediately responded to requests for clarification.
Egypt's subdued inflation is partly the result of tighter control of the money supply since a 2016 IMF programme, a concerted push to invest in agriculture and lack of consumer demand because of the coronavirus pandemic.
M2 money supply growth slipped to as low as 11.33% last year from as high as 25.4% in the wake of the three-year, $12 billion 2016 IMF agreement. Since the outbreak of the pandemic, M2 has once again begun climbing.
Investment in agriculture, mainly by the government, reached a substantial 0.92% of gross domestic product in fiscal 2018/19, according to central bank figures. Food products form an important part of the consumer price basket.