US Federal Reserve interest rate cut pushes up Egyptian stock index

Sherine El Madany
4 Min Read

CAIRO: Egypt’s Monetary Policy Committee (MPC) recently announced that it would keep its key overnight interest rates unchanged at 8.75 percent for deposits and 10.75 percent for lending.

After decisions to cut the US Federal Reserve interest rates by 50 basis points to 4.75 percent, Egyptian financial institutions were at odds whether the Central Bank of Egypt would keep rates unchanged or lower them by 25 basis points.

“The Federal Monetary Open Market Committee (FOMC) [decision] was triggered by concerns over the economic growth of the US amid credit tightening, explained Reem Mansour, senior economist at HC Brokerage firm.

“Unlike the FOMC, the MPC does not have to worry about the economy s growth with Egypt growing at 7.1 percent in fiscal year 2007 against 6.9 percent in fiscal year 2006 and [with more] prospects of growth ahead, she added.

On the other hand, the committee echoed concerns over inflationary pressures and stated it would not vacillate to adjust rates to “ensure price stability over the medium-term.

“Hence the MPC is expected to keep a close eye on the market and economic conditions with an inclination towards a monetary policy tightening if inflationary pressures intensify, Mansour added.

Inflation rate peaked to over 12 percent last winter after a rise in gasoline prices – due to subsidy cuts – coupled with an outbreak of bird flu. It retreated to 8 percent in July but rose to 8.5 percent in the year to August, above government as well as market expectations.

“Economic growth can be behind the surge in inflation rates, but it is not the only factor to blame, she pointed out.

She said that part of inflationary pressures was due to an surge in domestic food prices on the heels of a rise in international prices such as wheat, maize, and oil.

“Another factor is the seasonal increase in demand before and during the holy month of Ramadan, as suppliers tend to increase prices remarkably during this time of the year, she added. “In due cause, we do not expect inflation rates for September to go down.

Impacts of the Fed rate cut were direct on the Egyptian bourse as foreigners seeking attractive alternatives to the US dollar deposits pushed up Egyptian stock indices, some to record highs.

The benchmark CASE 30 index ended at an all-time high of 8,608.62 points last Wednesday. Main gainers were blue-chip stocks particularly EFG-Hermes and Orascom Telecom. Subsequently, profit-taking on giant stocks pushed the bourse down on Thursday, with Commercial International Bank and Orascom Construction Industries hardest-hit.

“The differential between the overnight deposit rate and fed rates currently hover around 400 basis points. This is wide enough to encourage investors to convert their deposits into Egyptian pounds, which might raise concerns over the pound’s stance appreciating against the US dollar, Mansour stated.

An appreciation in local currency against the dollar, she indicated, might cause a surge in prices of Egyptian exports on international markets, adversely affecting trade balance.

“Still, Egypt [adheres to] a managed float foreign exchange system which prevents a shoot up in the appreciation of the Egyptian pound against the US dollar, she said. “Moreover, [domestic] interest rates hover around a spread of 150-200 basis points only, indicating that the difference between the pound and dollar interest rates is not as wide as it may seem.

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