Defying fed, Egypt cuts rates again as inflation falls

Pedestrians use the stairs outside of Egypt’s central bank in Cairo, Egypt.  Photographer: Shawn Baldwin


Egypt’s central bank cut interest rates for the second time in six weeks after inflation slowed into its target range, shrugging off rising U.S. rates as it unwinds record-high borrowing costs. The monetary policy committee led by Governor Tarek Amer lowered the overnight deposit rate by 100 basis points to 16.75 percent. The move was predicted by all eight economists surveyed by Bloomberg. The overnight lending rate was also reduced by 100 basis points to 17.75 percent.

Egypt began its widely-anticipated easing cycle last month, cutting interest rates for the first time since it floated its currency in 2016. Analysts said the decision would benefit businesses and consumers hurt by high borrowing costs, and aid growth as the economy shakes off the aftermath of the 2011 uprising that ousted President Hosni Mubarak. Annual inflation fell to 14.4 percent in February, its lowest level since October 2016, after hovering around 30 percent for much of last year. The bank has lowered the benchmark by a total 200 basis points this year.
The decline in inflation may be interrupted by the next round of subsidy cuts scheduled for the second half of the year. The central bank said in a statement it was closely watching the “timing and magnitude of potential subsidy-reform measures” as well as the “crude oil price developments and the pace of tightening financial conditions.”
“The rate cut was expected given the sharp fall in inflation, but the CBE is likely to pause until the second half of the year before easing further. This will give it the chance to evaluate the inflationary effects of future rounds of subsidy reductions. It’ll also allow it to assess the impact of the recent cuts on portfolio inflows, which are so vital to the economy.”

— Ziad Daoud, Bloomberg Economics.


The regulator has set an inflation target range of 13 percent plus or minus three percentage points by the fourth quarter of 2018 and single digits thereafter.

T-Bill Relief

The decision comes amid concerns that higher U.S. interest rates will fuel a battle for funds among emerging markets. Egypt lifted borrowing costs by 700 basis points after floating the pound in late 2016 to curb record inflation as it embarked on an IMF-backed economic overhaul. The high rates raised borrowing costs for the government but helped attract some $20 billion into local-currency Treasury bills, whose before-tax offered yields surged to about 22 percent in mid-2017.

Rapid cuts, however, could tarnish the allure of Egyptian T-bills if yields follow suit. Investors have not turned away so far, and economists said they were reassured that the central bank had not decided to slash rates more sharply after beating its inflation target. “There was a view that with inflation slowing so fast the central bank might cut more, but foreign investors will be reassured by relative caution,” said Oliver Weeks, economist at Emso Asset Management Limited, a London-based company that holds Egypt T-bills.

The yield on one-year notes fell 12 basis points to 16.559 percent in the government’s debt auction Thursday. Returns have dropped by about 160 points since the beginning of the year, as investors priced-in the interest rate cuts. ”Yields could dip slightly but not by much, because the market was already expecting the lower rates even before the central bank started the easing cycle last month,” said Mohamed Abu Basha, head of macro analysis at investment bank EFG-Hermes in Cairo. “The fact that the cuts seem to be gradual means that they will not put much pressure on yields.”

Sources and photo-credits: Bloomberg