Egypt Makes Largest-Ever Rate Cut to Tackle Fallout of Outbreak
Egypt cut interest rates by the most ever in an emergency meeting, a sign the central bank is less focused on the risk of outflows as the North African nation races to limit the economic impact from the global coronavirus outbreak.
The Monetary Policy Committee reduced the overnight deposit rate by 300 basis points to 9.25% and the lending rate to 10.25%, the central bank said Monday in a statement. It trimmed rates a combined 450 basis points last year. The MPC’s next meeting had been scheduled for April 2.
“It’s a very bold and unexpected decision,” said Radwa El-Swaify, head of research at Cairo-based Pharos Holding. “A foreign exit from fixed-income portfolios in emerging markets will happen anyway, regardless of the rates. That is why it was critical to cut rates in support of the local economy, irrespective of foreign portfolio investments or the carry trade.”
Egypt, which has offered investors the world’s second-most profitable carry trade this year, is joining a parade of rate cuts around the world as countries look to deploy stimulus and slow the spread of the coronavirus.
With emerging markets swept up in an unprecedented sell-off, Egypt has already seen the pound weaken in recent days. The central bank may also have been emboldened by the first slowing in Egyptian inflation since October.
“We believe the rate cut is likely to accelerate portfolio outflows from the Egyptian local market, and that risks of a depreciation have risen materially,” Farouk Soussa, a Goldman Sachs Group Inc. economist, said in a report.
The Arab world’s most populous nation has reported 166 cases of the virus, including four deaths, as of Tuesday. It acted on rates the day after the U.S. Federal Reserve unexpectedly cut its benchmark by a full percentage point to near zero. Gulf nations, including Saudi Arabia and the United Arab Emirates, followed suit earlier Monday.
Egypt, where the tourism industry is vital to the economy, has announced it’s halting flights from the nation’s airports from Thursday through the end of the month to stem cases of the illness. Many civil servants have been advised to work from home.
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“The central bank has clearly thrown its usual caution out of the window and opted for a mega rate cut. It’s likely concerned about the impact of the outbreak of the virus on the economy. Both exports and tourism will probably slow and there are additional costs from the spread of the virus inside Egypt.”
The government said it has allocated 100 billion Egyptian pounds ($6.4 billion) to combat the coronavirus, without specifying what the funding will go toward.
The central bank Sunday announced a range of measures to protect the economy. It’s giving businesses and individuals a six-month extension for credit repayments and canceling ATM withdrawal fees for the same period.
“The MPC’s preemptive decision provides appropriate support to domestic economic activity given the current challenging external environment,” the central bank said.
©2020 Bloomberg L.P.