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.
