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Egypt cut its main interest rates by a full percentage point as the lowest inflation in almost a decade allowed the central bank’s third consecutive reduction to spur investment without dimming the allure of the world’s best carry trade.
The Monetary Policy Committee reduced the deposit rate to 12.25% and the lending rate to 13.25%, the bank said in a statement on Thursday. All but one of 14 analysts surveyed by Bloomberg had predicted a decrease. Goldman Sachs Group Inc. now sees a pause in December, followed by a total of 150 basis points of easing next year.
The Arab world’s most populous nation has been on a mission to bring inflation under control after prices were sent rocketing by a currency devaluation and subsidy cuts enacted to seal a $12 billion International Monetary Fund loan. The future of the central bank’s easing cycle is now less clear, since inflation probably hit bottom for the year in October, reaching an annual 3.1%, a 10th of its level just two years ago.
“Given the continued strengthening of the Egyptian pound and barring any material changes to inflation expectations — on account of unforeseen food price volatility — in the remainder of the year, our base case remains that the central bank will be on hold in December and resume its easing cycle in 2020,” Goldman Sachs economists led by Farouk Soussa said in a report.
“With this decision Egypt’s central bank may be revealing a more data-driven easing path than we had previously anticipated,” they said.
A sharp deceleration in food costs helped fuel the slowdown, but so too did the statistical effect of a high base last year. That’s set to fade in coming months but will likely remain within the central bank’s target range of 9%, plus or minus 3 percentage points, by the fourth quarter of 2020.
“Incoming data continued to confirm the moderation of underlying inflationary pressures, notwithstanding the expected impact of unfavorable base effects on near-term inflation rates,” the central bank said.
Egypt’s fourth rate cut for 2019 is unlikely to dent the attractiveness of its carry trade, in which investors borrow in currencies where rates are low and invest in the local assets of countries where they’re high.
The country’s real borrowing costs — the difference between its inflation and policy rates — are among the highest of more than 50 economies tracked by Bloomberg. With a global move toward easing, Egypt has leeway to cut while keeping its debt yields attractive.
“Since the real yield continues to be significantly high, we expect foreign investments in fixed income not to be affected by the decision,” said Radwa El-Swaify, head of research at Cairo-based Pharos Holding.
The reduction could also help the Middle East’s fastest-growing economy with its goals of boosting private investment and slashing debt-servicing. The government said this week it targets 6.4% growth in the 2020-2021 fiscal year. Finance Minister Mohamed Maait has said he’d like the private sector’s share of gross domestic product to rise to 70% in the next five to seven years.
Recent cuts “provide appropriate support to economic activity,” the central bank said.
“It almost brings the rates back to pre-IMF program levels, which should provide support for a gradual recovery in private investments,” said Mohamed Abu Basha, head of research at Cairo-based investment bank EFG Hermes.