Egypt’s Central Bank Makes Surprise Interest Rate Cuts

Egypt’s central bank unexpectedly lowered its main overnight interest rate by 50 basis points at a policy meeting on Thursday, saying it was more concerned about boosting growth than taming resurgent inflation.

Ministers appointed after the military removed Islamist President Mohamed Morsi from power on July 3 have said they will pursue an expansionist policy to get the economy running after 30 months of stagnation.

But inflation rose sharply in the year to end-June and all 13 economists in a Reuters survey had forecast that rates would not change at Thursday’s meeting.

“Give that the downside risks to the GDP outlook outweigh the upside risks to the inflation outlook, the MPC decided to cut the key CBE rates,” the bank’s Monetary Policy Committee said in a statement accompanying the decision.

Egypt’s economy has not recovered from the popular uprising that ousted Hosni Mubarak in 2011. Gross domestic product grew by 2.3 percent in the nine months to end-March after 1.8 percent in the same period a year earlier, well below the 6 percent pace thought necessary to absorb new entrants to the labor force.

“I read it as one of the ways to kick-start the real economy. Lowering the cost of money allows businesses to have access to cheaper funding,” said John Sfakianakis, chief investment strategist at MASIC, a Riyadh-based investment firm.

The central bank cut the deposit rate to 9.25 percent and the lending rate to 10.25 percent. It lowered its discount rate and the rate it uses to price one-week repurchase and deposit operations to 9.75 percent.
QUICKENING INFLATION

Urban consumer price inflation surged to an annual 9.8 percent in June from 8.2 percent in the year to May, while core inflation, which strips out subsidised goods and volatile items such as fruit and vegetables, rose to 8.56 percent from 8.04 percent.

The MPC statement said heightened uncertainly and weak growth of credit to the private sector since early 2011 had kept investment low.

The central bank had been under pressure to keep interest rates high to attract funds into the local currency.

The pound weakened after the 2011 uprising, which chased away tourists and investors, two main sources of foreign exchange.

“The central bank is signalling that they think the crisis is fading and that with support from the Gulf now in, they can encourage growth by cutting rates without putting the currency under pressure,” said Simon Williams, an economist with HSBC.

Gulf Arab countries pledged $12 billion in aid to help Egypt’s new government shore up the economy after the army removed Mursi. Of that, $5 billion has already been deposited at the central bank.

Since Morsi’s ousting, the black market in foreign currency has almost disappeared after Gulf funds arrived and as confidence in the pound increased.

Source: Reuters