Egypt Unexpectedly Cuts Rates to Boost Economy Hit by Unrest

Egypt’s central bank unexpectedly cut its benchmark interest rate, seeking to spur an economy that’s been hobbled by persistent political unrest.

The bank reduced the overnight deposit rate by half a percentage point to 8.25 percent today and the overnight lending rate by the same amount to 9.25 percent. All eight economists surveyed by Bloomberg had expected the bank to keep the deposit rate on hold.

The bank has cut rates three times by a total of 1.5 percentage points since July, when the army toppled President Mohamed Morsi. Escalating violence since then, as security forces cracked down on Morsi’s Islamist supporters, has added to the tensions that have kept investors and tourists away since the revolt against Hosni Mubarak in 2011. The government has announced more than $4 billion of new spending to help create jobs and boost output.

“They’re complementing the fiscal stimulus with further monetary easing to help the economy recover,” said Mohamed Abu Basha, an economist at Cairo-based investment bank EFG-Hermes. “Their view is that economic activity is weak to an extent that you can ease monetary policy further without risking inflation.”

Gulf Funds

Egypt’s gross domestic product expanded 1.5 percent in the last three months of the fiscal year that ended in June, after growing more than 2 percent in each of the previous three quarters. The International Monetary Fund forecasts growth of 1.8 percent this year and 2.8 percent in 2014, compared with an average of about 5 percent in the decade before Mubarak’s fall.

Inflation accelerated to 10.4 percent in October, the highest in more than two years.

Gulf Arab states supportive of the military intervention have pledged about $15 billion in assistance since Morsi’s ouster. The arrival of some of those funds created space for rate cuts by bolstering reserves, strengthening the pound and helping bring down the government’s borrowing costs.

One-year bills sold at an auction earlier today yielded 11.33 percent, down more than four percentage points from late June, before the army takeover.

The yield on Egypt’s benchmark dollar bonds maturing in 2020 was little changed after the rate decision, trading at 7.21 percent at 6:15 p.m. in Cairo.

Source: Bloomberg