Real Rate Outlier Egypt Tees Up Cuts After Record Currency Rally

(Bloomberg) -- Egypt’s central bank will probably pick up right where it left off last year, with another round of easing cutting into one of the world’s highest real interest rates.

The case for reducing borrowing costs is boosted by gains in the pound following a record appreciation in 2019. Governor Tarek Amer, whose drama-filled first four years in office included a steep currency devaluation, is starting his new term with a more narrow focus on containing inflation after briefly bringing it to the lowest in almost a decade.

For the central bank, the dilemma is whether it should look past the turmoil gripping the region and cut rates for a fourth straight time. Only three of 18 economists polled by Bloomberg predict the benchmark deposit rate will stay at 12.25% on Thursday. The rest see a cut of between half a percentage point and as much as 150 basis points.

Read more: Egypt’s Red-Hot Currency Continues to Rise as Inflows Pick Up

Standard Chartered Plc, which forecasts a decrease of 50 basis points, said the outlook is so muddled that the chances for a hold or a reduction of a full percentage point are “evenly split.”

Despite boasting the Middle East’s fastest economic growth, Egypt remains in need of monetary stimulus to rev up lending and the private sector, as business activity has contracted in all but two of the past 16 months, according to the Markit Egypt Purchasing Managers’ Index.

“With inflation and financial stability risks well-contained, another moderate rate cut would facilitate the Egyptian economy’s continued recovery without many adverse repercussions,” said Phoenix Kalen, a strategist at Societe General SA in London. “Furthermore, a still a high real interest rate means that Egyptian assets are well protected despite the large cumulative policy easing since the third quarter of 2019.”

But the unrest sweeping the region could be a reason to hit the brakes for the central bank, according to Goldman Sachs Group Inc., which qualified its call for a 50 basis-point rate cut by saying it has no “strong conviction” on the outcome. From tensions around Iran to clashes in Libya, Egypt’s neighbor to the west where it backs one side of the conflict, geopolitics are complicating the central bank’s calculus.

“The spike in the December inflation print and increased regional geopolitical tensions” -- including the standoff in Libya -- are among factors that “may argue for a near-term pause in the easing cycle,” Goldman’s London-based economist Farouk Soussa said in a report.

Even with last month’s acceleration in annual inflation, it remains well within the central bank’s target range of 9%, plus or minus 3 percentage points, by the end of 2020. On a monthly basis, prices fell both in November and December.

Egypt’s local-currency bonds returned 45% last year, the biggest gain in emerging markets and about six times the average for local-currency bonds among developing nations. And the pound reached the strongest level since February 2017 this week, after gaining almost 12% against the dollar in 2019.

The appreciation in 2019 “was driven by three key foreign-currency sources -- remittances, tourism and foreign investment in fixed income,” and those factors will continue to strengthen the pound this year, said Radwa El-Swaify, head of research at Cairo-based Pharos Holding.

If the pound maintains those gains in 2020, that could add to the attractiveness of Egyptian debt.

Further appreciation “would continue to boost the foreign-exchange gains for existing portfolio investors as well as new ones,” said Reham El Desoki, an independent Cairo-based economist

©2020 Bloomberg L.P.