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MPC Cuts Key Rates.. What Does This Mean For Economy?


Sat 16 Feb 2019 | 12:56 PM
Yassmine Elsayed

By: Yassmine ElSayed

CAIRO, Feb. 16 (SEE) - The Egyptian Central Bank’s Monetary Policy Committee (MPC) announced a cut in its main interest rates by a percentage point each, the first such move since March 2018, as inflationary pressures ease and investor inflows recover from last year’s rout in emerging markets.

“As incoming data continued to confirm the moderation of underlying inflationary pressures, the MPC decided to cut key policy rates by 100 basis points,” the bank said.

the cut would still allow it to meet its inflation target of 9 percent, plus or minus 3 percent, in the last quarter of 2020.

On its part, Cairo-based investment bank CI Capital said in a report that the rate cut illustrates the central bank’s confidence in Egypt’s economic outlook, despite global headwinds. The decision capitalizes on Egypt’s improving foreign exchange position, capital flows, and inflation dynamics, it added.

CI Capital forecast another 2 percentage-point drop in rates spread over the first and last quarters of 2019, with the central bank likely to pause in the third quarter to absorb inflationary pressures from the scheduled energy price hikes.

The cuts come as the Egyptian pound appreciated to 17.546 against the U.S. dollar, its highest level since March 7, 2017, according to data compiled by Bloomberg. Analysts have attributed the appreciation to a rebound in foreign investment in local debt after a steep sell-off in Egyptian Treasury bills and bonds last year.

“Since the start of this year, an influx of foreign investment has supported a 15 percent rise in the stock market and pushed down local currency bond yields. This appears to have been a key reason behind the slight strengthening of the pound against the dollar over the past couple of weeks,” Capital Economics, said in a report. “We think that inflation will fall further, prompting additional rate cuts at the upcoming meetings.”

On other hand, ‘Beltone Financial Holding’ expected that the ‘surprising’ decision will enhance direct investments, however it is still too early to the private sector to get fully recovered.

Beltone explained that to increase loans for projects’ funding, it is necessary to further cut the interest rates. This would, in turn, keep EGP away from pressure in 2019, as the investment expenses would still be weak.

The decision will also deepen trust in the business climate, especially at domestic investors.