Egypt's annual urban inflation rate, the most closely watched price indicator, fell to 10.5 percent in May, its lowest level since August and giving the Central Bank of Egypt more latitude to keep key interest rates steady
Analysts had forecast urban inflation would fall to 10.7 percent in May from 11.4 percent in April.
They attributed the bigger-than-expected drop to favourable base effects and a decline in food and beverage prices, which account for more than 40 percent of the basket used to measure inflation.
Beltone Economist Reham ElDesoki said she expected urban inflation to be volatile in coming months, pressured by higher consumer spending during the summer and the muslim holy month of Ramadan.
ElDesoki said that "We expect annual headline inflation to fluctuate in those summer months, possibly rising until September, when the lower monthly inflation and base effect leads to a decline in the annual change in the consumer index"
The urban consumer price index EGCPI=ECI for May was 147.1 versus 133.1 a year ago, the state statistics agency said on Thursday.
Inflation has been on a downtrend since peaking at 23.6 percent in August 2008 but has fluctuated. It has been falling this year since hitting 13.6 percent in January.
Analysts are looking for signs that urban inflation may be declining, making it easier for the central bank to reduce its key overnight interest rates. It has left rates unchanged at its last five meetings after a series of cuts that began more than a year ago.
Meanwhile, a director of research at Phaors Hany Genena said that "In our opinion, we are approaching the end of the disinflation phase as the government moves aggressively to trim the budget deficit and domestic demand gains momentum"
Government moves to tackle the deficit include its recent decision to raise the sales tax on steel, cement and cigarettes.
A Reuters poll in April forecast inflation of 10 percent in the financial year that begins on July 1, 2010. Several economists polled forecast the central bank would not change interest rates this year.
On Thursday, economist at HC investment said that "Given the decline in May's headline inflation, we would expect interest rates to remain at their current level"
Last month, the central bank of Egypt that inflation remained within its comfort zone and interest rates were supportive of economic recovery. It next meets on June 17.
