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Egypt Primed for Emerging World's Deepest Rate Cuts After Turkey

Tarek El-Tablawy and Mirette Magdy

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Egypt’s inflation eased in August to its lowest level since the start of 2013, paving the way for what could be the second-biggest push to cut interest rates across emerging markets.

Consumer prices in urban parts of Egypt rose 7.5% from a year earlier, the state-run CAPMAS statistics agency said Tuesday. Core inflation, the gauge measured by the central bank that strips out volatile and regulated items, slowed to an annual 4.9% in August, the least in almost seven years.

Stronger disinflationary momentum all but clinches another rate cut when the central bank meets later this month. Despite the fastest economic growth in the Middle East, monetary stimulus could be warranted as business activity has contracted in all but two of the past 12 months, according to the Markit Egypt Purchasing Managers’ Index.

The depth of easing in Egypt could be second only to Turkey this year and next, according to BNP Paribas SA. The central bank already cut rates last month for the first time since February, reducing its benchmark by 150 basis points to 14.25%.

The “trajectory is for inflation to continue coming down in the second half of the year and for the central bank to continue to use that as a window to ease rates,” said Jean-Michel Saliba, a London-based economist with Bank of America Merrill Lynch.

When it cut rates last month, the central bank said the decision was “consistent” with achieving its inflation target of 9%, plus or minus 3 percentage points, by the end of 2020. But the bank said that future decisions remain “a function of inflation expectations, rather than prevailing inflation rates.”

Egypt Cuts Rates First Time in Six Months After Inflation Relief

The slowdown in inflation is a key gain for the bank. Egypt had seen consumer prices surge by over 30% after the November 2016 decision to devalue the currency as a first step in a sweeping economic program that helped secure a $12 billion International Monetary Fund loan.

The IMF’s funding and support for the program helped revive investor interest in the Arab world’s most populous nation, with billions of dollars from abroad being pumped into the local debt market as economic growth rebounded.

Even with the latest rate cut, Egypt remains attractive to foreign investors seeking ample returns from pumping money into short-term debt. The real interest rate is still strong compared to other emerging-market economies, according to Saliba. The Egyptian pound is the world’s second-best performer against the dollar this year with a gain of almost 9%.

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Inflation has stayed on the decline even after a recent reduction in fuel subsidies that carried the risk of stoking price rises. The surprise slowdown prompted Dubai-based Arqaam Capital to raise its call for rate cuts in Egypt, saying another 250 basis points of easing are now possible this year.

“The effects of fuel subsidy cuts and the energy price reforms are mostly behind us,” said Jaap Meijer, head of research at Arqaam Capital. “We become more bullish on Egyptian monetary-policy easing.”

To contact the reporters on this story: Tarek El-Tablawy in cairo at teltablawy@bloomberg.net;Mirette Magdy in Cairo at mmagdy1@bloomberg.net

To contact the editors responsible for this story: Alaa Shahine at asalha@bloomberg.net, Paul Abelsky, Michael Gunn

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