CAIRO: Egypt’s central bank cut Thursday key interest rates for the fourth time this year, bringing the overnight deposit rate to 9 percent and overnight lending to 10.5 percent.
The action was said to be part of a longer-term strategy by the Central Bank to boost economic growth in the face of the global economic slowdown.
After an evening meeting of the Central Bank of Egypt’s Monetary Policy Unit (MPC), rates were slashed by 50 basis points, a move many expected as annual inflation rates fell again earlier this month.
The bank also cut its discount rate by 50 basis points to 9.0 percent.
“The MPC will continue to take the necessary measures to contain the adverse effects of the global economic turmoil on the domestic economy, provided that they do not conflict with the price stability objective, wrote Rania Al-Mashat, MPC division chief, in a statement announcing the bank’s decision.
The rate cut signaled that the Central Bank is far more concerned with a slowdown in economic growth than it is with inflationary pressures.
“The global financial crisis continues to interrupt the domestic growth momentum, bringing domestic GDP growth in the third quarter of 2008/09 to 4.3 percent compared to 7.1 in 2007/08, the statement said.
“Moreover, despite tentative signs that the worst of the global downturn may be over, consensual projections point to a slow and gradual global economic recovery in 2010, it continued.
Inflation has continued to fall in Egypt since August, 2008. Headline CPI inflation fell to 10.2 percent in May, the lowest in more than a year, from 11.7 percent the previous month.
The inflation rate has tumbled by 13.4 percent since last August, when it reached its peak.
Analysts had widely seen a decline in interest rates as a likely outcome of the MPC’s meeting, though some said a hold on rates would also not have been a surprise since inflation has increased month-on-month since the beginning of the year.
One analyst noted that a decline in the growth of money supply to 6.9 percent in March of this year, versus 23.9 percent a year earlier.
Analysts have said, however, that despite the fact that inflationary pressures are off the table for the moment, they may well return later this year.
Three out of five economists surveyed by Reuters on Thursday had forecast the bank would keep rates on hold, while the two others saw a cut of either 25 or 50 basis points.
“While we anticipate that the annual inflation will decline to single digit levels by mid-2009, due to the strong base effect, we expect monthly inflation changes to be mostly positive in the second half of 2009, as the second half of the year is usually a time when inflationary pressures increase with the increased demand in summer and during the religious holidays, Reham ElDesoki, a senior economist at Cairo-based investment bank Beltone Financial, wrote in a statement.
There are signs that the Central Bank’s program of slashing interest rates has begun to have an effect. GDP growth, after sliding late last year, appears to have stabilized.
GDP growth climbed to 4.3 percent over the course of the first three months of 2009, up from 4.1 percent during the last three months of 2008.
“We also expect that the slight rebound in economic growth in the third quarter of 2008/09 could lead to some recovery in money supply growth, wrote ElDesoki.
As the Egyptian economy turns around and continues to grow at a faster clip, analysts predict that the Central Bank will reverse course on interest rates and continue its long-term policy of combating inflation.