CAIRO: For the second time this year, the Central Bank of Egypt (CBE) cut interest rates on the news that inflation continues to decline. The CBE slashed overnight deposit and lending rates by 0.5 percent each to 10 and 12 percent, respectively.
This decision follows one and a half months after the Central Bank made its first rate cut in three years, slashing both rates by a bold 1 percent.
Inflation continues to decrease, though it remains above higher than the CBE would like. CPI inflation fell to 13.5 percent in February 2009, down from 14.3 percent in January, according to a memo released by the CBE this weekend.
But the tension here is that though inflationary pressures continue to recede, the global economic recession has meant that GDP growth continues to falter. The rate fell to 4.1 percent in the final quarter of 2008, as compared to 5.8 percent the previous quarter.
“The slower growth rates witnessed in the manufacturing sector, in addition to the contraction in Suez Canal activity and exports, have led to the evident retreat in domestic economic growth, said Rania Al-Mashat, division chief of the CBE’s Monetary Policy Unit.
“Going forward, the dire prospects for global growth in 2009 are likely to exert further downward pressures on external demand with unfavorable repercussions on the domestic growth outlook, she said.
GDP growth was 7.1 percent for the 2007/2008 fiscal year.
Despite the government’s efforts to spur economic growth by lowering rates, the target still, experts say, is to manage inflation.
“In terms of objectives, the target is still inflation, said Reham ElDesoki, an economist and investment bank Beltone. “It’s a matter of how they manage it.
But even government officials have paid lip service to concerns over slowing economic growth. Bloomberg reported that Minister of Investment Mahmoud Mohiedin announced that he expected the economic growth rate to be between 4 and 4.5 percent for this fiscal year which ends in June.
Others are even less optimistic. ElDesoki said that Beltone has forecast 3.2 percent growth on the year.
Though Egypt has fared better in the economic crisis than most developed nations, a fall in the growth rate has not been the only sign of clouds gathering on the horizon.
The unemployment rate began to creep up in the fourth quarter of 2008, breaking a recent trend of declining unemployment numbers. With unemployment edging up to 8.8 percent in the fourth quarter, from 8.6 percent the previous quarter, the Central Bank appears eager to stem this shift in employment and prevent a snowball effect.
The economic recession hit the global economy with such speed, that economists are struggling to catch up and make accurate predictions for the future of the Egyptian economy.
ElDesoki said she believes that the inflation rate will fall into the single digits before long. ElDesoki does see, however, that an aggressive stance on interest rates by the CBE could mean that the inflation rate reverses course and creeps back up.
“I think that inflation could go back up by the end of the year, she said, “depending on international commodity prices.
She added that she expect the CBE to cut rates one or two more times before the end of the year.
Egypt can ill afford a significant drop in GDP because of the implications it could have on wages and employment numbers. The question remains, though, how low the CBE is willing to take interest rates to combat falling growth numbers.