March 16, 2020 / 4:25 PM / 20 days ago

UPDATE 2-Egypt's cuts interest rates by 300 basis points in face of coronavirus

* Rates at lowest level since early 2016

* Egypt vulnerable due to tourism sector

* Country closing schools, halting flights (Adds details, analysis)

By Nadine Awadalla

CAIRO, March 16 (Reuters) - Egypt’s central bank slashed its main interest rates by 300 basis points at an unscheduled meeting on Monday, saying it was making a “preemptive” move to support the economy in the face of the COVID-19 outbreak.

The bank’s monetary policy committee cut the overnight lending rate to 10.25% from 13.25% and the overnight deposit rate to 9.25% from 12.25%. Those are the lowest rates since early 2016, before Egypt embarked on a three-year IMF-backed economic reform programme.

“The MPC’s preemptive decision provides appropriate support to domestic economic activity given the current challenging external environment, while the inflation outlook remains consistent with achieving the inflation target of 9 percent (±3 percentage points) in 2020 Q4,” a statement from the central bank said.

“The MPC will continue to closely monitor all economic developments and will not hesitate to adjust its stance to achieve its price stability mandate over the medium term.”

The central bank’s monetary policy committee had not been due to meet until April 2 to set interest rates. It had held rates steady at its past two meetings after cutting them by 350 basis points between August and November last year.

Egypt has confirmed 150 cases of coronavirus, and three deaths. Its economy is particularly vulnerable to the crisis due to its large tourism sector, analysts say.

On Monday the government announced that it would halt all air traffic at its airports from March 19-31, a day after saying schools and universities would stay shut for two weeks to stop the spread of the virus.

“The hit from the coronavirus outbreak is likely to mount in the coming weeks and months and, with inflation no longer a major concern for the CBE, more stimulus probably lies in store,” said Jason Tuvey, senior emerging markets economist at Capital Economics.

Last year Egypt completed a three-year economic reform programme that won praise from economists, though the nation of 100 million has struggled to attract foreign investment or generate growth outside the hydrocarbons sector.

Year-on-year headline inflation spiked to as high as 33% in 2017 before gradually falling back. It slowed to 5.3% in February from 7.2% in January.

Even before the coronavirus crisis, analysts had argued for interest rate cuts to stimulate sluggish private sector growth.

“This is unexpected but highly welcome and long overdue,” said Allen Sandeep of Naeem Brokerage. “It comes in line with the trend globally, and follows signals from the (U.S.) Fed and even emerging economies like Brazil and Russia.”

The cut is “a brave move and very well placed” said Radwa El-Swaify, head of research at Cairo-based Pharos. “It will support growth, the budget deficit, the manufacturing sector and the stock market performance,” she said.

Writing by Ulf Laessing and Aidan Lewis Editing by Catherine Evans and Chizu Nomiyama

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