Egypt Unexpectedly Cuts Rate for First Time Since 2009

Egypt’s central bank unexpectedly lowered its benchmark interest rate for the first time since 2009 in a bid to revive economic growth amid political unrest.

The Monetary Policy Committee, headed by Governor Hisham Ramez, lowered the overnight deposit and lending rates by 50 basis points, or 0.5 of a percentage point, to 9.25 percent and to 10.25 percent, according to a statement on its website. All six economists in a Bloomberg survey had forecast the central bank would keep the deposit rate unchanged.

Egypt has been mired in deadly violence after the July 3 ouster of Islamist President Mohamed Mursi by the military following protests against his one-year rule. The Egyptian pound has stabilized following $12 billion in aid pledges from Gulf Arab states to help the country revive economic growth and boost foreign reserves. The pound gained 0.3 percent in July.

“Given that there are now less risks on the Egyptian pound, it seems that they thought they could cut interest rates to help stimulate the economy,” Mohamed Abu Basha, an economist at investment bank EFG-Hermes in Cairo, said by phone. “It’s just an attempt by the central bank but politics override all else now. For most investors it’s a question of political stability and future visibility, not of interest rates.”

Slowing Growth

The decision came even after inflation accelerated to 9.8 percent in June from 8.2 percent in the previous month, according to official data.

The central bank, though, said “the pronounced downside risks to domestic GDP combined with the persistently negative output gap since 2011 will limit upside risks to the inflation outlook going forward,” in the statement. “Given that the downside risks to the GDP outlook outweigh the upside risks to the inflation outlook, the MPC decided to cut the key” rates.

The military-backed interim government urged Mursi’s supporters today to end weeks of sit-ins and promised safe passage to those who comply, hours after the cabinet authorized police to take action. The appeal signaled a crackdown may be imminent against thousands of protesters.

Officials, including Prime Minister Hazem El Beblawi, have said restoring security was crucial to reviving economic growth. El Beblawi and his team inherited an economy that has suffered the worst slowdown in two decades, record unemployment and the highest budget deficit in the Middle East.

‘Signaling Instrument’

Growth may slow to 2 percent this year from 2.2 percent in 2012, according to International Monetary Fund data. It hasn’t exceeded 2.2 percent since Mubarak’s toppling, compared with an average of 6.2 percent in the previous five years, IMF data shows.

The MPC decision “is an important signaling instrument that the Central Bank of Egypt is comfortable that it can turn away its attention from external accounts on the back of recent GCC aid towards a more supportive growth stance,” said Jean-Michel Saliba, an economist at Bank of America Merrill Lynch in London. “Interest rate transmission mechanism is imperfect in Egypt but it should help to drive T-bill and overnight interbank rates lower,” he said by e-mail.

The average yield on one-year Treasury Bills plunged 50 basis points to 13.326 percent at an auction held today before the MPC announcement, according to central bank data on Bloomberg. The average yield on six-month securities dropped 39 basis points to 12.935 percent.

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