Egypt Cuts Interest Rates as Debt Market Seen Defying Fed Impact

(Bloomberg) -- Egypt cut interest rates for the first time since floating the currency at the end of 2016, starting a widely-anticipated easing cycle after record-high borrowing costs helped curb inflation and attract $20 billion into local-currency debt.

The monetary policy committee led by Governor Tarek Amer lowered the overnight deposit rate by 100 basis points to 17.75 percent. A cut was predicted by six out of nine economists in a Bloomberg survey. The overnight lending rate was also reduced by 100 basis points to 18.75 percent.

The central bank had raised borrowing costs by 700 basis points after it abandoned currency restrictions as it sought to control inflation and stabilize the pound. The measures helped secure a $12 billion International Monetary Fund loan, ease a crippling dollar shortage and unleash a deluge of foreign inflows into Egypt’s high-yielding debt.

The decision comes amid concerns over the impact of rising U.S. interest rates on emerging markets. But with inflation easing for a sixth month in January to 17.1 percent from a peak of 33 percent, the cut “does a great job of balancing global risks with domestic realities,” said Matthew Graves, who helps manage $442 billion at California-based Western Asset.

“Obviously the global backdrop has been a challenging one in recent weeks, and we think those kinds of market dynamics would give any central bank pause,” he said. “But ultimately, January’s inflation data strongly supported a cut.”

Inflation Target

The MPC said in its statement that cutting borrowing costs was in line with its target of reducing inflation to 13 percent, plus or minus three percentage points, in the fourth quarter. The outlook allows policy makers to focus on bolstering economic growth, which reached 5.3 percent in the last quarter of 2017.

The Market Vectors Egypt exchange-traded-fund gained after the decision, climbing to $33.57 at 1:26 p.m. in New York.

Even before the central bank reduced policy rates, the yields on Egyptian one-year Treasury bills fell to their lowest rate since two weeks before the float.

Yet at an average 15 percent yield, Egyptian debt still looks attractive, though some fund managers said that they may look to exit if yields drop much lower.

“The carry trade in Egypt remains very attractive,” said Brett Rowley, Managing Director at L.A. based TCW Group, which currently holds Egyptian debt. “Egypt’s undervalued currency and relatively high interest rates offer a sizable cushion against the recent pickup in global volatility.”

To contact the reporters on this story: Ahmed Feteha in Cairo at afeteha@bloomberg.net, 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, Lin Noueihed

©2018 Bloomberg L.P.