Cairo
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 assets.
The monetary policy committee led by Governor Tarek Amer lowered the overnight deposit rate by 100 basis points to 17.75 per cent. 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 per cent.
The central bank had raised borrowing costs by 700 basis points after it abandoned currency restrictions as it sought to control inflation and stabilise 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 rate cut signals that policymakers are shifting their attention to promoting economic growth even if it dents the allure of local-currency assets. Annual inflation, which peaked at 33 per cent in July, has eased for six months in a row to 17.1 per cent in January.
“The rate cut today is only the beginning,” said Ziad Daoud, a Dubai-based analyst with Bloomberg Economics.
“We expect inflation to keep falling, giving the central bank space to lower rates further. The main concern is whether Egypt will continue to be an attractive destination for portfolio investments, particularly if the Federal Reserves also raises rates in the coming months,” he said.
The MPC said in its statement that cutting borrowing costs was in line with its target of reducing inflation to 13 per cent, plus or minus three percentage points, in the fourth quarter of 2018.
“Inflationary pressures have been contained, a consequence of tighter real monetary conditions,” the committee said.
The Market Vectors Egypt exchange-traded-fund gained after the decision, climbing to $33.57 at 1:26pm 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 per cent yield, Egyptian debt still looks attractive, though some fund managers said that they may look to exit if yields drop below 12 per cent.
“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 sizeable cushion against the recent pickup in global volatility.”
