CAIRO: For the first time in almost three years, Egypt’s Central Bank announced its decision to cut key interest rates in a continuing effort to stimulate Egypt’s stagnant economy.
Rania Al-Mashat, who heads the bank’s Monetary Policy Unit (MPU), said in a statement that the overnight deposit rate would be cut by 1 percent to 10.5 percent. The lending rate was also cut by 1 percent down to 12.5 percent.
The decision, which was announced following a Feb. 12 meeting, was widely anticipated by economists who expected the government to respond to the floundering economy.
“This was expected, said Suha Najjar, managing partner and head of research at Pharos Holding. “I think everyone was expecting a half percent, 1 percent cut.
Over the past couple of years, the Central Bank had pursued an aggressive policy of raising interest rates to combat inflation that at points reached well above 20 percent.
A decrease in inflation and a collapse of international commodity prices, though, has allowed the bank to cut rates this month.
Headline inflation dropped to 14.3 percent in January, down from 18.3 percent the month before.
And the Central Bank anticipates continued protection from inflationary pressures as 2009 continues.
“The risks to the domestic inflation outlook are lower in light of the deteriorating prospects for global growth in 2009 and given the sharply declining international commodity prices, said Al-Mashat in a statement.
“Against this background, the MPC judged that a less restrictive monetary policy stance is required, at this juncture, in order to stabilize economic growth around its potential, she added.
Some economists, though, question the impact that changing interest rates will have on the economic situation here.
“The high inflation was because we’re a net importer, said Najjar. “Unfortunately raising interest rates didn’t do much to inflation because we imported much of our inflation.
Egypt relies on imports for much of its food supply. With prices increasing dramatically over the past several years, Egypt found itself the victim of global inflationary pressures.
With last fall’s economic collapse globally, though, inflationary concerns vanished.
Despite the disappearance of inflationary pressures, certain commodity prices in Egypt remain high.
Najjar noted that commodity prices, in some cases, had increased by two or three times before the economic collapse.
Even the Central Bank acknowledged that such high prices will be difficult to combat with interest rates alone.
“It is important to emphasize, said Al-Mashat in a statement, “that the sharp retrenchment in international commodity prices, which had begun since August 2008, has not been fully reflected in domestic price levels due to the downward price rigidities in the domestic market.
“No matter what the Central Bank does, it is going to have a very limited effect, echoed Najjar.
Najjar said she also sees continued resistance to investment as 2009 progresses, meaning that the rates might not have the desired effect.
“The cut in interest rates, she said, “might be offset by the lower demand for credit.
As the Central Bank announces its latest change, of course, Najjar argued that high loan growth would be the best indicator that the rate cuts are having the desired effect of kick-starting the economy. Loan growth would signal that more liquidity is entering the market.
Economists tend to agree that this rate cut may be the first of several over the course of 2009 in a continued effort to breathe life into the economy.
“I wouldn’t be surprised if they cut another 2 percentage points this year, said Najjar.
