CAIRO  - Egypt's annual urban consumer price inflation fell to 4.2% in July from 5.6% in June, the central statistics agency CAPMAS said on Monday.

Month on month inflation increased to 0.4% in July from 0.1% in June mainly on the back of an increase in electricity and energy prices, the agency said.

Allen Sandeep, head of research at Naeem Brokerage, called the fall in the annual rate a "positive surprise", highlighting a 0.9% monthly drop in the price of food.

Consumer demand ahead of and during the Muslim holiday of Eid al-Adha, which fell on July 31, had slowed likely due to concerns over spending at a time of uncertainty, Sandeep said.

July's inflation rate however remained well below the central bank's target of 9% plus or minus three percentage points.

At its last monetary policy meeting, the central bank held the overnight lending rate at 10.25% and the overnight deposit rate at 9.25%.

"We still feel that Egypt's central bank will hold its horses for a couple of months as we see through all the effects of the pandemic," Sandeep said.

Egypt's economy was hit hard by the coronavirus lockdown that paralysed tourism and other vital sectors, leading to a cut in growth forecasts for the 2019/2020 fiscal year to 4.2% from 5.6% prior to the crisis.

(Reporting by Nadine Awadalla; Editing by Kevin Liffey, Kirsten Donovan) ((Nadine.Awadalla@thomsonreuters.com;))