Egypt: Central Bank Makes 3rd Straight Cut to Interest Rates

Thursday, 14 November, 2019 - 18:30
Asharq Al-Awsat

Egypt's central bank cut its key interest rates on Thursday at its third consecutive policy meeting since August, after inflation fell to its lowest in nearly 14 years and central banks continued to ease monetary policy globally, Reuters reported.

The overnight deposit and lending rates were cut by 100 basis (bps) points to 12.25% and 13.25% respectively.

"Incoming data continued to confirm the moderation of underlying inflationary pressures, notwithstanding the expected impact of unfavorable base effects," Reuters quoted the central bank as saying in a statement explaining the decision.

The cut was in line with expectations. Eight out of 14 economists surveyed by Reuters had expected the Central Bank of Egypt (CBE) to cut rates by 100 bps. Two predicted a 50 bps cut, two foresaw the bank slashing 150 bps and two expected no change.

Egypt's annual urban consumer price inflation fell to 3.1% in October from 4.8% in September, its lowest rate since December 2005, according to Refinitiv data.

Headline inflation stood at 17.7% in October 2018, mainly due to a shock rise in the price of fruit and vegetables that prompted the state to intervene to ensure supply. It cooled to 15.7% in November 2018 and to 12% the following month.

The CBE targets inflation of 9% plus or minus 3 percentage points. It cut rates by a combined 200 bps in August and September.

"The 100 bps cut is good although, in my view, the cut could have been more aggressive given Egypt's fast falling inflation rates," said Angus Blair, chairman of business and economic forecasting think-tank Signet. He said he expected the bank to make another 100 bps cut when it meets next month.

Radwa El-Swaify, head of research at Pharos Securities Brokerage, said the "widely expected" decision would help stimulate higher private investments and lower the government's debt servicing costs.

Egypt's non-oil private sector contracted in October for the third straight month, according to the IHS Markit Egypt Purchasing Managers' Index. It has expanded in only six of the past 36 months, and just two months of the past year.

Swaify said yield on Egypt's securities would continue to be attractive despite the cut.

"Since the real yield continues to be significantly high, we expect foreign investments in fixed income not to be affected by the decision, especially after the Fed monetary easing last week and in light of YTD strength in the EGP against the USD."

The Egyptian pound (EGP) has appreciated nearly 10% against the dollar in the year to date (YTD).

"While there remains some more room to cut interest rates, the CBE continues to remain prudent by not being aggressive," said Allen Sandeep, head of research at Naeem Brokerage, which he said was "the sustainable path".

Analysts have said the recent low inflation figures were largely a result of favorable base effects from last year.

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