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CAIRO, Aug 22 (Reuters) - Egypt’s central bank on Thursday cut the overnight deposit rate by 150 basis points to 14.25%, its first cut since February, after July inflation figures came in significantly below expectations.
The overnight lending rate was cut by 150 basis points to 15.25%, the bank said in a statement after a meeting of its monetary policy committee (MPC).
Seven out of 13 economists polled by Reuters had forecast the bank would cut overnight rates by 100 bps. Three had predicted a 150 bps cut.
The move came after headline inflation slowed to 8.7% in July from 9.4% in June, surprising analysts who had expected inflationary pressures to rise in the wake of a round of subsidy cuts that pushed fuel prices 16-30% higher.
“The drop in inflation emboldened them to go deeper,” said Maya Senussi, senior economist for the Middle East at Oxford Economics.
“The decision also probably reflected low trending oil prices,” she said. “And the assumption that the second-round inflationary impact of the subsidy cuts will be limited.”
Analysts expect further rate cuts, with Egyptian investment bank CI Capital forecasting a 1% cut in September.
A second consecutive cut in policy rates was necessary, it said, to mark the resumption of a monetary easing cycle and so as not to disappoint local and global investors.
“As incoming data continued to confirm the moderation of underlying inflationary pressures, the MPC decided to cut key policy rates by 150 basis points,” the bank statement said.
“The path for future policy rates remains a function of inflation expectations, rather than of prevailing inflation rates,” it added.
Hany Farahat, general manager and head of market intelligence at Banque Misr, called the decision “a clear signal of confidence in Egypt’s outlook, and a turning point towards an awaited higher post-IMF growth cycle.”
The Egyptian pound has appreciated about 7% against the dollar since the beginning of the year.
Scaling back fuel subsidies that have strained the budget for decades was a key plank of a three-year, $12 billion reform package signed with the International Monetary Fund in 2016.
The IMF deal, aimed at luring back investors after the years of turmoil that followed Egypt’s 2011 uprising, also included a sharp devaluation of the pound and the introduction of a value-added tax.
Millions of Egyptians are still struggling to make ends meet, despite the more positive economic data.
Figures from the state statistics agency CAPMAS showed that the percentage of Egyptians living below the poverty line rose to 32.5% in the 2017-2018 financial year from 27.8% in 2015-2016.
Angus Blair, chairman of business and economic forecasting think-tank Signet, said the decision “will help the economy of course, but it has to get lower still to encourage the private sector to raise debt.”
“For the government, it is more important because it will help diminish the interest payments, therefore freeing more capital for the government to spend more money in the real economy,” he said.
Barring its energy sector, Egypt has struggled to attract foreign direct investment since 2011, with the first quarter of 2019 seeing the lowest non-oil FDI in at least five years.
“The impact on investments will appear in the second half of 2020 after the cumulative cuts reach 3-5%,” said Radwa El-Swaify, head of research at Pharos Securities Brokerage.
$1 = 16.5200 Egyptian pounds Reporting by Ulf Laessing, Yousef Saba and Nadine Awadalla Editing by Gareth Jones, David Evans and Alexandra Hudson
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