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 selloff.
The Monetary Policy Committee reduced its benchmark deposit rate by 150 basis points to 14.25% and its lending rate to 15.25%, the bank said Thursday in a statement. Ten of 12 analysts surveyed by Bloomberg had predicted a cut.
“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%, plus or minus 3 percentage points, in 2020 Q4 and price stability over the medium term.”
The move may boost what’s already the fastest economic growth in the Middle East, while a favorable 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 U.S.-China trade war hits assets elsewhere.
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.
Inflation figures for July showed it’s made headway: the annual rate hit 8.7%, 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% for the rest of 2019 as the statistical effect of last year’s spike fades.
Further reductions may be on the cards before January, but that’ll still leave Egypt’s with one of the highest real interest rates and average yields on local-currency bonds among its peers.
Cuts of 100-200 basis points this year “should not have an impact on foreign appetite for local Treasury instruments,” Radwa El-Swaify, head of research at Cairo-based Pharos Holding, said before the announcement.
Foreigners have been making “very lucrative” returns due to the strength of the Egyptian pound against the U.S. dollar “and the relatively low level of macro and country risk in Egypt compared to other emerging markets,” she said.