Cairo: Egypt cut interest rates for the first time in six months as slowing inflation and a stable currency allowed the central bank to shrug off the risk of contagion from an emerging-market sell-off.

The Monetary Policy Committee reduced its benchmark deposit rate by 150 basis points to 14.25 per cent and its lending rate to 15.25 per cent, the bank said Thursday in a statement. Ten of 12 analysts surveyed by Bloomberg had predicted a cut of at least 100 basis points.

“As incoming data continued to confirm the moderation of underlying inflationary pressures, the MPC decided to cut key policy rates,” the central bank said. “This remains consistent with achieving the inflation target of 9 per cent, plus or minus 3 percentage points, in the fourth quarter of 2020 and price stability over the medium term.”

The move may boost what’s already the fastest economic growth in the Middle East, while a favourable inflation outlook means it’s unlikely to dim Egypt’s allure as one of the most profitable carry trades in emerging markets, even as a US-China trade war hits assets elsewhere.

“It’s higher than expected and will be well received by the markets,” Mohamed Abu Basha, head of macroeconomic analysis at Cairo-based investment bank EFG-Hermes, said of the reduction. “Another cut of maybe 100 basis points will start to trigger the capital expenditure cycle and encourage businesses to start investing,” he said.

The Arab world’s most populous country has been on a mission to tame inflation stemming from a late-2016 devaluation of the pound and other measures enacted to secure a $12 billion loan from the International Monetary Fund and revive the economy after years of turmoil.

Headway against inflation

Inflation figures for July showed it’s made headway: the annual rate hit 8.7 per cent, the lowest in four years, even after a recent reduction in fuel subsidies that carried the risk of stoking price rises. Analysts say the rate will likely remain below 10 per cent for the rest of 2019 as the statistical effect of last year’s spike fades.

The move may set the stage for further rate cuts before the end of the year, analysts said.

“We deem necessary a second consecutive cut in policy rates, to mark the resumption of a monetary easing cycle,” Cairo-based investment bank CI Capital said in a note. “A one- and-done rate cut would cast high doubts on the economic outlook, and disappoint both local and global investors.”

The central bank said “the pace and magnitude of future policy rates adjustment will continue to be subject to confirmation that inflation expectations are anchored at target levels that are consistent with disinflation and price stability over the medium term.”

Real Interest

Even with Thursday’s reduction, “Egypt remains one of the highest yielding emerging markets in real terms for offshore investors,” said Bilal Khan, senior economist at Standard Chartered Plc in Dubai. The bank expects “significant additional easing” of up to 400 basis points by June.

Cuts of 150 basis points are possible this year and “should not have an impact on foreign appetite for local Treasury instruments,” according to Radwa El-Swaify, head of research at Cairo-based Pharos Holding.

Foreigners have been making “very lucrative” returns due to the strength of the Egyptian pound against the US dollar “and the relatively low level of macro and country risk in Egypt compared to other emerging markets,” she said.