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Egypt Keeps Rate at Record High as Subsidy Cuts Spur Caution - BLOOMBERG
(Bloomberg) -- Egypt kept interest rates at a record high as it weighs the effects of a new round of subsidy cuts on inflation that’s been slowing for five straight months.
The central bank maintained its deposit rate at 27.25% and the lending rate at 28.25%, its Monetary Policy Committee said Thursday in a statement. The decision was correctly predicted by six of nine economists surveyed by Bloomberg. The others, including Goldman Sachs Group Inc., expected a cut of 100 basis points.
Authorities hiked the key rate by 8 percentage points in two steps early this year, but caution is reigning after they made a wave of steep price hikes for fuel products, electricity and subsidized bread over the summer.
“Current policy rates remain appropriate to maintain the prevailing tight monetary stance until a significant and sustained decline in inflation is realized,” the bank’s committee said in a statement. Inflation is forecast “to hover around current levels until the fourth quarter of 2024, given the implemented and projected fiscal consolidation measures.”
Year-on-year inflation in the Middle East’s most populous country was 25.7% in July, having cooled from a record 38% in September 2023.
The figures have been defying many economists’ predictions by maintaining a slowdown even after Egypt in March let its pound plunge nearly 40% a bid to stem a two-year economic and foreign-exchange crisis. The move helped seal a global bailout led by the International Monetary Fund and United Arab Emirates that totaled around $57 billion.
The central bank “won’t rush for now, given the need to entrench disinflation trends,” Jean-Michel Saliba of Bank of America Corp. said before the monetary policy decision.
The central bank may also have taken into account a limited early-August decline in the pound against the dollar driven by a wider investor selloff in emerging markets. Egyptian authorities estimated foreign-capital outflows amounted to 7% to 8% of total holdings. It’s unclear if some of those have returned.
“Monitoring the pound’s weakness, albeit relatively small, on inflation expectations is warranted,” Mohamed Abu Basha, head of research at Cairo-based investment bank EFG Hermes, said before the decision to hold rates.
Egypt opted not to pre-empt a likely US Federal Reserve rate cut later in September. Such a move would probably make it easier for Egypt to ease monetary policy and remain attractive to foreign portfolio investors.
The Fed makes its decision on Sept. 18 and most analysts predict a cut of 25 basis points. Egypt’s monetary policy committee is scheduled to meet again on Oct. 17.
--With assistance from Sherif Tarek.
(Updates with deckheads, context on Egypt’s economic situation.)
