Egypt Central Bank's governor, Hisham Ramez (Photo: Al-Ahram)
Egypt's Central Bank surprisingly cut key interest rates by 50 basis points on lower inflation expectations driven by cheap oil.
The overnight deposit and lending rates were cut to 8.75 percent and 9.75 percent respectively, the Central Bank of Egypt's Monetary Policy Committee announced on Thursday. The discount rate was also cut to 9.25 percent.
"Upside risks from imported inflation continue to be contained on the back of lower oil prices and the consequent revision in international food price forecasts," it said in a statement.
"In light of recent global developments and the reassessment of risks surrounding the inflation outlook and domestic GDP, the MPC decided to cut the key... rates."
Key interest rates were last changed in July 2014, when the committee raised them 100 basis points each to contain inflation following the government's decision to cut fuel subsidies.
The central bank "does not have any reason to keep rates high," Hany Genena, chief economist at Pharaos Holding, said in a phone interview. "All the factors, especially the fall in oil prices, indicate that inflation in the coming six months or even year will be dropping."
Brent crude prices have dropped about 54 percent in the past year on oversupply and weak demand from Europe and Asia. Brent crude was down 26 cents a barrel on Thursday at $48.43 a barrel.
"The fall in oil prices means that producers locally and internationally have no reason to raise prices," Genena said, highlighting the potential benefits of cutting rates. "A lower interest rate means cheaper borrowing for the government and further support to the private sector."
The shock from July's cut in fuel subsidies, which raised pump prices by up to 78 percent, is "easing," Genena said. "Even if diesel prices increase in Egypt, the fall in oil prices internationally means that production inputs will be cheaper for local producers."
Prices rose an annual 10.13 percent in December from 9.1 percent in November.