Egypt Cuts Benchmark Rate for First Time in Nearly a Year

(Bloomberg) -- Egypt’s central bank unexpectedly cut the benchmark deposit rate by 100 basis points Thursday, its first such move in almost a year, as inflationary pressures ease and investor inflows recover from last year’s rout in emerging markets.

The Monetary Policy Committee cut the deposit rate to 15.75 percent and brought the lending and discount rates down one percentage point to 16.75 percent and 16.25 percent, respectively.

“Incoming data continued to confirm the moderation of underlying inflationary pressures,” the MPC said in its statement. It said the cut would still allow it to meet its inflation target of 9 percent, plus or minus 3 percent, in the last quarter of 2020.

Five of seven economists surveyed by Bloomberg had predicted the central bank would keep rates unchanged amid concerns that fuel subsidy cuts expected around mid-year would push up the annual inflation rate.

Egypt Cuts Benchmark Rate for First Time in Nearly a Year

“Today’s policy rate cut illustrates the central bank’s confidence in Egypt’s economic outlook, despite global headwinds,” Cairo-based investment bank CI Capital said in a report. The decision capitalizes on Egypt’s improving foreign exchange position, capital flows, and inflation dynamics, it added.

CI Capital forecast another 2 percentage-point drop in rates spread over the first and last quarters of 2019, with the central bank likely to pause in the third quarter to absorb inflationary pressures from the scheduled energy price hikes.

The central bank said the acceleration of the urban inflation rate in January to 12.7 percent, from 12 percent in December, was mainly due to unfavorable base effects. The bank achieved its fourth-quarter 2018 inflation target of 13 percent (+/- 3 percentage points).

Currency Moves

The cuts come as the Egyptian pound appreciated to 17.546 against the U.S. dollar, its highest level since March 7, 2017, according to data compiled by Bloomberg. Analysts have attributed the appreciation to a rebound in foreign investment in local debt after a steep sell-off in Egyptian Treasury bills and bonds last year.

“Since the start of this year, an influx of foreign investment has supported a 15 percent rise in the stock market and pushed down local currency bond yields. This appears to have been a key reason behind the slight strengthening of the pound against the dollar over the past couple of weeks,” Capital Economics, one of the few to predict a cut, said in a report. “We think that inflation will fall further, prompting additional rate cuts at the upcoming meetings.”

The currency is in the spotlight after Egypt last year ended a repatriation mechanism that ensured foreign investors could get their dollar earnings out of the country. Though it reflects growing investor confidence in Egypt, the shift toward the open market is also likely to expose the pound to more volatility.

While the central bank has said it stands ready to fend off speculators and ensure debt holders don’t lose out from increased fluctuations in the currency, the Finance Ministry just cut its forecast for the pound’s value against the dollar in its mid-year report.

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Further Cuts?

Economists argue that while inflation has slowed significantly since soaring to over 30 percent in the wake of the November 2016 decision to devalue the pound and lift capital controls, upcoming fuel subsidy cuts could result in a fresh rise.

Egyptian officials, however, are optimistic that the gains emerging from the 2016 economic overhaul that helped clinch its $12 billion International Monetary Fund loan, will be help absorb the impact.

The central bank cited a recovery in economic growth to 5.5 percent in the fourth quarter of 2018 and a decline in unemployment to 8.9 percent, its lowest level since December 2010.

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