Egypt’s Central Bank Cuts Interest Rate, Government Sets Realistic Expectations for EGP

Central Bank of Egypt's headquarters is seen in downtown Cairo. Reuters
Central Bank of Egypt's headquarters is seen in downtown Cairo. Reuters
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Egypt’s Central Bank Cuts Interest Rate, Government Sets Realistic Expectations for EGP

Central Bank of Egypt's headquarters is seen in downtown Cairo. Reuters
Central Bank of Egypt's headquarters is seen in downtown Cairo. Reuters

Egypt’s central bank cut its key interest rates by 100 basis points for the second meeting in a row on Thursday, but the Ministry of Finance announced the same day reducing its expectations of the Egyptian pound (EGP) dollar exchange rate, which analysts describe as realistic.

The central bank raised interest rates by 700 basis points on several steps. But last February, the bank moved to curb interest rates as inflationary pressures subsided.

In a statement issued Thursday evening, the bank stated: “Annual urban consumer price inflation fell to 14.4 percent in February while core inflation, which strips out volatile items like food, fell to 11.9 percent.”

The bank cut its overnight deposit rate to 16.75 percent from 17.75 percent and its overnight lending rate to 17.75 from 18.75 percent, said the statement.

Bloomberg agency reported that the yield on one-year notes fell 12 basis points to 16.559 percent in the government’s debt auction. Returns have dropped by about 160 points since the beginning of the year, as investors priced-in the interest rate cuts.

Bloomberg quoted head of macro analysis at investment bank EFG-Hermes in Cairo Mohamed Abu Basha as saying that yields could dip slightly but not by much, because the market was already expecting the lower rates even before the central bank started the easing cycle last month.

“The fact that the cuts seem to be gradual means that they will not put much pressure on yields,” Abu Basha added.

Egypt is expected to make new increases in the prices of fuel, electricity and public transportation under a plan adopted by the country to liberalize the energy support system and rebuild social policies.

Meanwhile, Egypt’s Prime Minister Sherif Ismail told reporters on Thursday the new budget set the price of petroleum at $67 per barrel and the US dollar exchange rate at EGP 17.25.

This means a reduction in the government's assessment of the value of the EGP against the dollar, where in previous budgets, the US dollar was valued at 16 EGP. It also means the government increased its forecasts for oil prices, which was estimated in the budget 2017-2018 at $55 per barrel.

Senior economist at regional investment bank Arqaam Capital, Reham el-Desoki told Asharq Al-Awsat that this is not a devaluation of the EGP, but the expectations in the current budget are not realistic.

Desoski expects a relative stability of the local currency in the next two and a half years, unless surprised with unexpected jump in tourism revenues.

Ismail indicated that total investments according to the new plan are estimated at EGP 942.2 billion, an increase of about 46 percent compared with last year's figures.

Later, Finance Minister Amr al-Garhy said the budget of next fiscal year is valued at EGP 1.412 trillion.

During a television interview, Garhy said that the total budget deficit of GDP is 8.4 percent, compared with current year’s deficit between 9.6 and 9.8 percent.



Oil Falls on Signs of Progress in US-Iran Talks amid More Market Stress

The sun is seen behind a crude oil pump jack in the Permian Basin in Loving County, Texas, US, November 22, 2019. REUTERS/Angus Mordant/File Photo
The sun is seen behind a crude oil pump jack in the Permian Basin in Loving County, Texas, US, November 22, 2019. REUTERS/Angus Mordant/File Photo
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Oil Falls on Signs of Progress in US-Iran Talks amid More Market Stress

The sun is seen behind a crude oil pump jack in the Permian Basin in Loving County, Texas, US, November 22, 2019. REUTERS/Angus Mordant/File Photo
The sun is seen behind a crude oil pump jack in the Permian Basin in Loving County, Texas, US, November 22, 2019. REUTERS/Angus Mordant/File Photo

Oil prices fell more than 2% on Monday on signs of progress in talks between the US and Iran while investors remained concerned about economic headwinds from tariffs which could curb demand for fuel.

Brent crude futures slipped $1.51, or 2.2%, to $66.45 a barrel by 1115 GMT after closing up 3.2% on Thursday. US West Texas Intermediate crude was at $63.11 a barrel, down $1.57, or 2.4%, after settling up 3.54% in the previous session. Thursday was the last settlement day last week because of the Good Friday holiday, Reuters reported.

"The US-Iran talks seem relatively positive, which allows for people to start thinking about the possibility of a solution," said Harry Tchilinguirian, group head of research at Onyx Capital Group. "The immediate implication would be that Iranian crude would not be off the market."

Markets also have lower liquidity due to the Easter holiday, which can exacerbate price moves, he added. In the talks, the US and Iran agreed to begin drawing up a framework for a potential nuclear deal, Iran's foreign minister said, after discussions that a US official described as yielding "very good progress." The progress follows further sanctions by the US last week against a Chinese independent oil refinery that it alleges processed Iranian crude, ramping up pressure on Tehran.

Markets also came under stress on Monday, after US President Donald Trump last week made criticisms about the Federal Reserve. Gold prices rose to another record, with jitters rippling into energy markets due to concerns about demand, according to analysts.

"The broader trend remains tilted to the downside, as investors may struggle to find conviction in an improving supply-demand outlook, especially amid the drag from tariffs on global growth and rising supplies from OPEC+," said IG Market Strategist Yeap Jun Rong. OPEC+, the group of major producers including the Organization of the Petroleum Exporting Countries and allies such as Russia, is still expected to increase output by 411,000 barrels per day starting in May, though some of that increase may be offset by cuts from countries that have been exceeding their quotas. A Reuters poll on April 17 showed investors believe the tariff policy will trigger a significant slowdown in the US economy this year and next, with the median probability of recession in the next 12 months approaching 50%. The US is the world's biggest oil consumer.

Investors are watching for several US data releases this week, including April flash manufacturing and services PMI, for direction on the economy.

"This week's series of PMI releases could further underscore the economic impact of tariffs, with both manufacturing and services conditions across major economies expected to soften," IG's Yeap said, adding oil prices face resistance at the $70 level.