Egypt cuts interest rates by 50 points as inflation subsides

The economy grew by a preliminary 3.5% in the year ended on June 30

Egypt's central bank (pictured) says inflation remained well below the target range of 6 per cent to 12 per cent. Reuters

Egypt's central bank unexpectedly cut its main overnight interest rates by 50 basis points on Thursday, saying exceptionally low inflation gave it room to help boost the economy.

The bank's Monetary Policy Committee (MPC) reduced the lending rate to 9.75 per cent and the deposit rate to 8.75 per cent, it said in a statement.

Of 18 analysts polled, 15 had expected the bank to keep rates steady and three had expected it to reduce them by one percentage point.

"The reduction of policy rates provides appropriate support to economic activity, while remaining consistent with achieving price stability over the medium-term," the MPC said.

Annual urban consumer price inflation fell to 3.4 per cent in August, the second lowest level in almost 14 years, from 4.2 per cent in July. Inflation had slid to 3.1 per cent last October but rebounded in subsequent months.

Inflation remained well below the central bank's target range of 6 per cent to 12 per cent, the MPC statement said.

The MPC expected inflation to hover around the lower band of the 6 per cent to 12 per cent in the rest of 2020.

Overnight interest rates are at their lowest since early 2016, before Egypt embarked on a three-year, International Monetary Fund-backed economic reform programme. Egyptian one-year treasury bills carried an average yield of 13.6 per cent at an auction on Thursday.

Egypt's economy grew by a preliminary 3.5 per cent in the year ended on June 30, according to the MPC statement, well below the 5.6 per cent the government had forecast before the coronavirus pandemic began hitting the economy in February.

"The cut shows the central bank is not worried about capital flight in the short term and is comfortable with inflation, which is expected to stabilise at 5.5 per cent towards the end of this year," said Arqaam Capital's Noaman Khalid, who had forecast a 100 basis point reduction.

Foreign holdings of Egyptian treasury bills rebounded in July to $10.9 billion (Dh40bn) at the end of June, the central bank said on Thursday.

In March, foreign investors sold more than half of their Egyptian pound treasury bill holdings as the coronavirus pandemic led them to pull money out of emerging markets.