|14 February, 2019

Egypt central bank cuts key interest rates after inflation eases

The bank lowered its deposit rate to 15.75% from 16.75 and its lending rate to 16.75% from 17.75

People and vehicles are seen in a traffic jam in front of the old Central Bank of Egypt's headquarters in downtown Cairo, Egypt July 25, 2017.

People and vehicles are seen in a traffic jam in front of the old Central Bank of Egypt's headquarters in downtown Cairo, Egypt July 25, 2017.

REUTERS/Amr Abdallah Dalsh

CAIRO  - Egypt's central bank made a surprise cut to its overnight interest rates on Thursday, citing a strong drop in inflation and an improvement in other macroeconomic indicators.

The bank lowered its deposit rate to 15.75 percent from 16.75 and its lending rate to 16.75 percent from 17.75, it said in a statement, its first rate cuts since March 2018.

Ten out of 14 economists polled by Reuters said the bank's Monetary Policy Committee (MPC) was unlikely to change its overnight rates, while only four expected it to cut them. 

The MPC said data "continued to confirm the moderation of underlying inflationary pressures", leading it to lower rates by 100 basis points.

"This remains consistent with tight real monetary conditions and with achieving the inflation target of 9 percent (plus or minus 3 percentage points) in 2020 Q4 and price stability over the medium term."

Consumer inflation fell to 12.0 percent in December and 12.7 percent in January from 15.7 percent in November, while core inflation edged up to 8.6 percent year in January from 8.3 percent in December.

The MPC said GDP growth had risen slightly to an annual 5.5 percent in last quarter of 2018 and unemployment, at 8.9 percent, had fallen to its lowest since 2010.

"I think it’s a very good move," Hany Farahat, senior economist at Egyptian investment bank CI Capital, said of the rate cut. "More importantly, it predicts further cuts in policy rates throughout 2019, which is going to be very good for the investment environment."

He said net foreign assets picked up in January and foreign inflows into the treasuries market had increased, accompanied by a 1.5 percentage point fall in yields over the last month.

The MPC last cut interest rates by 100 basis points in March and another 100 bps in February 2018.

"All of the economic indicators were welcoming a reversion to normality," said Wael Ziada, head of investment company Zilla Capital. "The high interest rates were not sustainable."

"Macro relief is imminent. Inflation as you continue to restructure will be an accompanying pain, but short lived with spikes related to time of significant events."

(Reporting by Sami Aboudi and Patrick Werr; Editing by Toby Chopra) ((Sami.Aboudi@thomsonreuters.com; +20223948181;))

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