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IN DEPTH: Egypt's interest rate cuts expected to spur growth - Daily News Egypt

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IN DEPTH: Egypt's interest rate cuts expected to spur growth

The Central Bank of Egypt cut last week key interest rates, signaling the government’s continued stance of encouraging economic growth while worrying less about inflationary pressures. Analysts have been quick to sound off on the latest cuts, saying that it was expected given the campaign by the government over the past year to spur growth. …


The Central Bank of Egypt cut last week key interest rates, signaling the government’s continued stance of encouraging economic growth while worrying less about inflationary pressures.

Analysts have been quick to sound off on the latest cuts, saying that it was expected given the campaign by the government over the past year to spur growth.

The Monetary Policy Committee said that it would cut both the overnight deposit and the overnight lending rates by .25 percent. The deposit rate, therefore, stands at 8.25 percent, whereas the lending rate is currently at 9.75 percent. The bank declined to move the discount rate.

“Against this background, the MPC assesses that the current level of policy interest rate, wrote Rania Al-Mashat, division chief of the bank’s Monetary Policy Unit, “is appropriate and supportive of the economic recovery while consistent with maintaining underlying inflation within the CBE s comfort zone.

The central bank has cut interest rates six times since February.

The government’s decision to further cut interest rates was spurred, in part, by continued good news with regard to inflation.

“The cut is in line with our expectations, albeit with a lower magnitude, due to the decline in annual inflation and the CBE’s apparent focus on core inflation, which had been declining in recent months by the MPC’s core measure, wrote Reham ElDesoki of Beltone Financial.

ElDesoki, though, noted that the cuts were slightly less ambitious than Beltone had expected, leading her to wonder whether the CBE has grown nervous about inflationary pressure over the second half of the year.

Pharos Holding echoed a similar sentiment.

“The recent shift, the firm wrote in a memo this week, “in medium-term global growth and inflation dynamics leads us to believe that the CBE may review the path of monetary easing.

CI Capital also expected the cut, saying, “As inflation cooled off, interest rate policy is now shifting to support investment, especially with the drop of 9.1 percent in implemented investments during fiscal year 2008/09.

Headline inflation fell once again from 9.9 percent in July of this year to 9 percent in August. This represents a dramatic turn of events, given that inflation spiraled higher late last year, reaching 23.6 percent in August of 2008. Beltone predicts that inflation will creep back to 11 percent towards the end of the year.

When weighing its monetary policy, though, the government says it evaluates not only headline inflation rates but also an inflation rate which discounts volatile food items.

Because Egypt is a low-income country, the basket of goods used to determine inflation is heavily weighted with food items. The problem, says the bank, is that fruits and vegetables prove to be volatile and, therefore, skew researchers’ ability to accurately judge inflation.

Inflation without counting fruits and vegetables, wrote Al-Mashat, fell from 14.4 percent over the first eight months of 2008 to 4.2 percent in the first eight months of 2009.

The government’s latest move is part of a broader campaign to cut interest rates over the long term. With the onset of the economic crisis, Egypt’s severe inflationary pressures receded and were replaced with fears that economic growth, so critical to this developing country, would vanish.

Pharos added several other reasons that the CBE may pursue a short-term agenda of rate cutting.

“Weak expansion in private sector credit (up to June 2009), subdued core inflationary pressures and a high spread between rates on Egyptian Pound and US Dollar-denominated assets will underpin monetary easing in the short-term, it wrote.

By making lending easier, the government has sought to encourage businesses to continue expanding operations in Egypt.

And to a large extent, the bank has succeeded. GDP growth was 4.7 percent for the 2008-2009 fiscal year. While down from the growth rate of the previous several years, the rate remained positive, while growth in most developed nations declined over the past year.

Beltone predicts that the growth rate for the 2009-2010 fiscal year will be down from the previous fiscal year. Though still positive, the brokerage firm predicts that growth will come in at around 3.9 percent for the fiscal year. The caveat it offers, though, is that growth levels – and, by extension, the future of interest rates – are largely contingent on the success of spending stimulus money.

“The recent announcement of the injection of fiscal spending during the year, however, will possibly lead us to revise our growth estimates, depending on when the government starts spending and the magnitude of the stimulus package, wrote ElDesoki.

While talk of a double-dip recession and fears that recovery will be sluggish abound, the Central Bank predicts that the health of the global economy will continue to improve.

“There are encouraging signs that the global slowdown has stabilized somewhat over recent months and the outlook for the international economy appears to have improved as well. This coupled, with the domestic fiscal and monetary measures undertaken so far will help provide a conducive environment for the domestic economy, wrote Al-Mashat.

To read the other stories in our monthly special focus on Egypt s banking sector, click here:

http://thedailynewsegypt.com/article.aspx?ArticleID=24712http://thedailynewsegypt.com/article.aspx?ArticleID=24710http://thedailynewsegypt.com/article.aspx?ArticleID=24709http://thedailynewsegypt.com/article.aspx?ArticleID=24708

Topics: FJP

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https://www.dailynewsegypt.com/2009/09/23/in-depth-egypts-interest-rate-cuts-expected-to-spur-growth/
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