Emergency Rate Cut Gives Way to Pause in Egypt to Dodge Outflows
Egypt Holds Rates to Keep Debt in Demand Amid Markets Sell-Off
(Bloomberg) -- Egypt held interest rates steady on Thursday, counting on last month’s record cut being enough to support the economy without exposing its debt to an emerging market sell-off spurred by the coronavirus.
The central bank maintained the deposit rate at 9.25% and the lending rate at 10.25%, according to a statement. Nine of 10 economists surveyed by Bloomberg had predicted a hold after authorities slashed 300 basis points at an emergency meeting on March 16.
The Monetary Policy Committee said it “moved preemptively” to bolster businesses and households, and its prior cut “should support employment in these exceptional times, which is essential in order to avoid a prolonged slowdown in economic activity and help speed the recovery once the outbreak is contained.”
Egypt, which has reported 850 cases of the virus including 52 deaths, is seeking to avert the outflows that have seen investors pull a record $83.3 billion from other developing-nation equity and debt markets in March. The North African nation’s currency has for now bucked the trend, posting the second-best global performance against the dollar this year.
Keeping the pound strong will be a challenge, with Egypt’s main sources of foreign currency -- tourism, remittances and Suez Canal receipts -- all threatened by a combination of the virus and the oil-price crash. The government has implemented a nighttime curfew and other restrictions to stem the outbreak in the country of about 100 million people.
Authorities may also be waiting to judge the impact of the pandemic on inflation, which was an annual 5.3% in February after topping 30% during the early stages of an International Monetary Fund-backed reform program.
Since its 2016 devaluation, Egypt has become the Middle East’s fastest-growing economy and a darling for fixed-income investors, offering some of the highest real rates of return in the world.
The central bank, still monitoring the impact of March’s cut, needs to track inflation for the next one or two months, “given the expected volatility in food prices as a result of the lockdown and irrational buying behavior,” said Radwa El-Swaify, head of research at Cairo-based Pharos Holding.
The MPC is likely to be “very cautious” about any further cuts as it needs to “sustain some foreign investment in Egypt’s sovereign debt instruments,” she said.
The central bank said it “closely monitors all economic developments” and wouldn’t hesitate to “utilize all available tools to support the recovery of economic activity, within its price stability mandate, supported by the previous macroeconomic reforms.”
©2020 Bloomberg L.P.
