Central Bank slashes key interest rates, brushes off inflation concerns

Theodore May
5 Min Read

CAIRO: In a move that many analysts had not predicted, the Central Bank of Egypt (CBE) announced Thursday night that it would slash several key interest rates as part of a continuing effort to stimulate the Egyptian economy.

The CBE announced that it is cutting its overnight deposit rate by 0.5 percent to 8.5 percent. It also said that the discount rate would come down by the same amount, also to 8.5 percent. And it cut the overnight lending rate to 10 percent.

This move marks the fifth time in 2009 that the bank has cut the country’s overnight rates.

As part of its reason for continuing to cut interest rates, the CBE explained that inflation has continued to decline, thereby giving the CBE the excuse to further stimulate the economy without worrying too much about inflation.

The CPI inflation numbers for June of this year, according to the CBE, fell to 9.9 percent, representing an 18-month low. That number is down from 10.2 percent the month before and significantly off its August 2008 high of 23.6 percent.

Some analysts had predicted that a slowdown in the decline of inflation might be enough for the CBE to hold its rates steady. They also said that with summer and the approach of Ramadan likely to drive food inflation, the CBE might be inclined to safeguard against the threat of spiraling prices.

But the CBE saw it otherwise.

“It is important to underscore that during the first six months of 2009, transient supply shocks mainly related to volatile food items, namely fruits and vegetables, have emerged. While these shocks have flattened the disinflation path, they do not characterize the underlying inflationary pressures, wrote Dr Rania Al-Mashat, division chief of the CBE’s Monetary Policy Unit, in a statement announcing the interest rate cuts.

According to Al-Mashat, inflationary numbers, excluding fruits and vegetables, fell between the first half of 2008 and the first half of 2009 from 11.5 percent to 3.1 percent.

The continued efforts by the CBE to stimulate the economy seems to be beginning to pay off as some analysts say that numbers are starting to turn around.

“We expect annual inflation will have declined to the single-digit level in July, wrote Reham ElDesoki from Beltone Financial, “the figures for which should be announced in early August.

“Broad money supply growth had rebounded in May, to 8.5 percent from 6.8 percent the month before, and we expect the announcement of June’s monetary aggregates today will show continued recovery in money supply growth. Economic growth had also slightly recovered in the third quarter of 2008/09, inching up to 4.3 percent, from 4.1percent in the second quarter of 2008/09.

Despite the fact that much of the talk about interest rates, both by the CBE and analysts, has continued to revolve around inflation management, both parties agree that the economy still needs stimulation as many suspect that the worst of the recession has passed.

The CBE takes a more bearish outlook to the economy, questioning how robustly the economy will rebound in 2010.

“In the meantime, wrote Al-Mashat, “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 percent on average over the past three years. Moreover, despite tentative signs that the worst of the global downturn may be over, consensual projections point to a sluggish and uneven global economic recovery in 2010.

ElDesoki from Beltone noted that the economy continues to under-perform, even though many economists have credited Egypt’s relatively strong position in the global economic crisis.

“We believe that economic growth in Egypt is still below its potential, with real growth sliding to an expected 3.9 percent in financial year 2009/2010, from our expectation of 4.5 percent in FY2008/2009, she wrote

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