Caution Rules as Egypt Holds Rates to Assess Fuel Subsidy Impact

(Bloomberg) -- Egypt’s central bank kept the benchmark interest rate steady on Thursday, opting to assess the impact of new round of subsidy cuts even as annual inflation hit a three-year low.

The Monetary Policy Committee kept the deposit rate at 15.75% and the lending rate at 16.75%. In a statement, it said that “keeping key policy rates unchanged at this juncture remains consistent with achieving the inflation target of 9 percent (+/-3 percentage points) in 2020 Q4 and price stability over the medium term.”

“The inflation outlook incorporated the recently implemented fiscal consolidation measures, that include reaching cost recovery for most fuel products as well as fuel price indexation to underlying costs,” the bank said.

All but two of 11 analysts surveyed by Bloomberg predicted a cut in the benchmark rate, even as some acknowledged that the surprising deceleration in the inflation rate in June may provide a catalyst for a reduction.

Egypt’s central bank “wanted to ensure the inflationary impact of the fuel price increase is in line with their expectation,” said Mohamed Abu Basha, head of macroeconomic analysis at Cairo-based investment bank EFG-Hermes. He predicted the first cut of 100 to 200 basis points would come September at the earliest.

The Arab world’s most populous country, whose high interest rates have made it a carry-trade darling, has been on a mission to tame inflation stemming from a 2016 devaluation of the pound and the IMF-backed economic overhaul. Annual price growth rocketed to well above 30% before the pace of increases cooled, reaching 9.4% in June.

Fueling Prices

Egypt’s latest, fourth cycle of fuel-price rises -- enacted July 5 -- are one of the concluding steps to ease pressure on public finances mandated by the IMF program. They’ll ripple through the economy, affecting everything from food to transportation, and heap yet more pressure on a nation of 100 million where half live near or beneath the poverty line.

The impact on inflation may turn out to be relatively muted since this year’s fuel-price increase was nearly half that introduced in 2018.

The decision to hold was expected “and the main driver was to contain the second round effect of the recent fuel price hike,” said Omneia Ramadan, senior economist at Dcode EFC, an Egypt-based consultancy firm. Ramadan said she expected the bank to cut rates in the fourth quarter by between 100-200 basis points.

Reductions later in the year are unlikely to diminish Egypt’s attractiveness in the carry trade, in which investors borrow in currencies where rates are low and invest in the local assets of countries where they are high, according to Abu Basha.

With possible easing by the Federal Reserve this year, “the whole global yield curve will shift down,” he said. That “should leave the central bank in a comfortable position to cut rates without impacting the attractiveness of Egypt.”

--With assistance from Rinat Gaynullin.

To contact the reporters on this story: Mirette Magdy in Cairo at mmagdy1@bloomberg.net;Tarek El-Tablawy in cairo at teltablawy@bloomberg.net

To contact the editors responsible for this story: Alaa Shahine at asalha@bloomberg.net, Michael Gunn, Paul Abelsky

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