Bloomberg: World’s Deepest Rate Cuts Beckon in Egypt

By: Yassmine ElSayed

CAIRO, Mar. 28 (SEE) - The Federal Reserve has handed Egypt another reason to proceed with what could be the world’s deepest series of interest-rate cuts.

According to Bloomberg, the U.S. central bank’s surprise forecast for no rate increases in 2019, combined with a rally in Egypt’s currency, means policy makers may deliver a reduction in borrowing costs for the second straight month on Thursday.

Renaissance Capital’s global chief economist Charles Robertson expects another cut of 100 basis points “due to a dovish Fed and to counter rapid pound appreciation.”

“Domestic demand is fragile, non-food inflation is low and globally central banks are shifting to an easing bias,” he said.

Most economists surveyed by Bloomberg predict the central bank will cut by a percentage point. Five analysts see the benchmark staying at 15.75 percent.

The central bank is still a long way from unwinding rate increases that it deployed to steady the pound and battle inflation after floating the currency in November 2016. While price growth has since stabilized, it accelerated for a second month to an annual 14.4 percent in February on the back of rising food costs.

A surge in the pound is helping keep price pressures in check. The Middle East’s best-performing currency this year is trading near its strongest level in two years. It has gained over 3.5 percent against the dollar since the start of 2019.

Egypt’s currency is benefiting from investor appetite in local debt. Inflows rose to $15.8 billion in February, offering officials some solace after a selloff in emerging markets last year prompted about $10 billion in outflows.

“Rates will be down in support of the debt control strategy and given that foreign investors continue to be super interested in Egypt’s treasury investments, in light of a stronger exchange rate and an attractive carry trade,” said Radwa El-Swaify, head of research at Cairo-based Pharos Holding.

Monetary stimulus is also needed to revive growth among Egyptian firms and attract foreign direct investment. Adding impetus is the need act ahead of a new round of planned fuel subsidy cuts by the end of the current fiscal year in June.

“Relatively stable core inflation and stronger capital inflows, combined with our view that the Central Bank of Egypt may want to loosen policy before upcoming subsidy cuts, means that an interest-rate cut seems more likely than not,” said Jason Tuvey, senior economist at Capital Economics.