The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) decided during its meeting last Thursday to cut the bank’s overnight deposit and lending rates, as well as the rate of main operations, by one per cent or 100 basis points (bps) to 13.25 per cent, 14.25 per cent, and 13.75 per cent, respectively.
Credit and discount rates were also down by one per cent to 13.75 per cent instead of 14.75 per cent.
The decline in rates was expected by analysts following the decrease in inflation rates in August to 7.5 per cent, the lowest since March 2013 when they stood at 7.6 per cent. Inflation had reached highs of around 30 per cent in the summer of 2017 following the floatation of the pound in November 2016.
Mona Bedeir, a senior economist at financial firm Prime Holding, said in a statement that the CBE was encouraged by lower inflation rates to cut its interest rates. The same thing had been seen in the US, where the Federal Reserve cut interest rates for the second time since 2008 this month amid concerns about slowing growth.
According to statistics agency the Central Agency for Public Mobilisation and Statistics (CAPMAS), Egypt’s annual consumer price inflation dropped to 6.7 per cent in August 2019, compared to 13.6 per cent in August 2018. Annual core inflation rate declined to 4.9 per cent in August 2019, against 5.9 per cent in August 2018.
Bedeir expects interest rates to continue to drop to 12.75 per cent by the end of this year and to reach 9.75 per cent by the end of 2020.
She added that the CBE had enough time to observe the effect of declines in interest rates on inflation before November’s meeting and that inflation was expected to remain under nine per cent in line with expectations for more interest rates cuts.
The MPC meets every six weeks to review interest rates.
Bedeir also said that the pound had strengthened against the dollar, with gains of 9.5 per cent since the beginning of 2019 and that it would continue to be stable and reach LE16.7 by the end of the year.
The pound’s value has been appreciating over recent months. The dollar was trading at LE16.23 on Tuesday, its lowest value against the pound since March 2017.
Foreign currency inflows, mainly from tourism, have improved Egypt’s trade balance and foreign investment in treasury bonds, and they have increased the foreign exchange reserves. These factors have also contributed to the appreciation of the pound against the dollar.
Egypt’s foreign reserves reached an all-time high of $44.9 billion at the end of July, coinciding with the country’s receiving a final $2 billion tranche of a $12 billion loan from the International Monetary Fund (IMF) under an agreement signed in 2016 to support Egypt’s economic reform programme.
“The dollar would have hit LE40 if it had not been for the economic reform programme,” said Mohsen Adel, former head of the General Authority for Investment and Free Zones (GAFI).
Adel believes that more foreign direct investment can be expected following the interest rates cuts, and he added that high interest rates had earlier hindered foreign investment in the Egyptian market. The cuts had given investors a positive message about the market’s performance, he said.
“There is a global tendency towards cutting interest rates to boost economic growth, and Egypt is following in these footsteps,” Adel noted, adding that he believed that any global economic crisis to come could be worse than that of 2008 and that the world’s economies were taking measures to boost growth, including by cutting interest rates.
Lower interest rates have seemed to attract more investments into the Egyptian stock market. Egypt’s EGX30 share index climbed by as much as 3.8 per cent on Sunday and 3.3 per cent on Monday after Thursday’s rate cuts.
According to the Reuters news agency, local financial institutions were net purchasers of shares and helped to push the index higher for a third straight session. The stock exchange suspended trading on around 70 shares for 10 minutes after they had climbed by more than five per cent during the first half hour of trading.
The rally in the stock market was a relief after it had incurred some of its biggest losses the week before on the back of rumours of anti-regime protests.
The interest rate cuts are also a blessing for the government, which borrows heavily from the domestic market to serve its budget deficit. Lower yields on treasury bills and bonds mean the government will be making huge savings.
Deputy Minister of Finance for Financial Policies Ahmed Kojak was quoted on Monday during the Beltone Access conference in Dubai as saying that the recent interest rates cuts would save LE20 billion to LE25 billion annually for the government budget.
“Every one per cent cut in interest rates saves LE8 billion to LE10 billion annually,” he added.
Nonetheless, Egypt will continue to be seen as an attractive fixed-income opportunity for investors, particularly with rising real interest rates, said Alia Mamdouh, director of macroeconomic strategy at investment bank Beltone Financial.
Mamdouh wrote in a note that Egyptian treasuries would remain attractive even after mirroring the interest rate cut, since they were underpinned by a strong pound and rising real interest rates given the decrease in inflation.
The high yields on Egyptian-pound denominated treasury bills have been attracting foreign investors for the past couple of years, he added, concluding that “among the emerging markets with comparable yields, Egypt still stands out with its improved macro indicators and plus-five per cent GDP growth.”