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Egypt central bank unexpectedly cuts rates to boost economy

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(Globalpost/GlobalPost)

By Shadia Nasralla

CAIRO (Reuters) - Egypt's central bank unexpectedly cut its key interest rates by 50 basis points each at a monetary policy committee (MPC) meeting on Thursday, saying it was more concerned about boosting growth than taming inflation.

The economy has yet to recover from the popular uprising that ousted Hosni Mubarak in 2011. Gross domestic product grew just 2.1 percent in the year to June 30, too slow to make an impact on youth unemployment, estimated at over 20 percent.

Urban consumer price inflation, meanwhile, hit 10.44 percent in October - its highest since July 2011 and up from 10.15 percent in September.

"Given that the downside risks to the GDP outlook outweigh the upside risks to the inflation outlook, the MPC decided to cut the key CBE rates," the Central Bank of Egypt said in a statement.

The bank cut its overnight deposit rate to 8.25 percent and its overnight lending rate to 9.25 percent. It also cut its discount rate and the rate it uses to price one-week repurchase and deposit operations to 8.75 percent.

Seven economists polled by Reuters had expected the central bank to leave its rates unchanged.

At its last meeting on October 31, the bank kept rates on hold in view of inflationary pressure while the government moved to stimulate the economy. It had cut rates in August and September by a cumulative 100 basis points.

"They're trying to aggressively stimulate the economy. This further complements the fiscal stimulus," said Mohamed Abou Basha, Cairo-based economist at EFG-Hermes.

The interim government launched a 29.6 billion Egyptian pound ($4.3 billion) stimulus package, aided by over $12 billion in aid pledged by Arab Gulf countries, after the army ousted Islamist President Mohamed Mursi in July following mass protests against his rule.

Ministers have announced another stimulus package for the coming months, and central bank governor Hisham Ramez said at an Egyptian-Gulf Arab investment forum on Wednesday that Egypt expects to receive more aid from Gulf states.

The central bank may be counting on more foreign aid, said William Jackson, economist at Capital Economics in London.

"It still looks like the economy is pretty sluggish," he said.

"We wouldn't be surprised to see more aid from the Gulf, which might have given the central bank more confidence that it can lower interest rates without causing further strains to emerge in the balance of payments."

INFLATION, POUND PROBLEMS REMAIN

The central bank remains concerned about high inflation, however, which may eventually lead it to raise interest rates.

"While upside risks to the inflation outlook continue to moderate as the possibility of a rebound in international food prices is unlikely in light of recent global developments, annual inflation could increase above their current levels in November and December," it said in its statement.

The weak Egyptian pound is another problem for the bank, which had been under pressure to keep rates high to attract foreign investors and help fund the country's large current account deficit.

The pound has slumped since the 2011 uprising, which chased away tourists and investors, two main sources of foreign exchange, and on the black market it has been trading even weaker than official rates.

The deficit on the current account, the broadest measure of the country's trade with the rest of the world, widened in the April-June quarter to $1.70 billion, an increase of $160 million from the same quarter of 2012.

($1 = 6.8871 Egyptian pounds)

(Editing by Michael Georgy and Hugh Lawson)

http://www.globalpost.com/dispatch/news/thomson-reuters/131206/egypt-central-bank-unexpectedly-cuts-rates-boost-economy