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Egypt cut interest rates for the third time this year, seizing on slower inflation, a stable currency and stocks rebounding after a rare bout of anti-government protests last week that rattled investors.
The Monetary Policy Committee lowered the deposit rate 100 basis points to 13.25%, in line with the median estimate from a Bloomberg survey of economists. It also brought the lending rate down to 14.25%, according to a statement on Thursday. While all 15 analysts in the survey predicted a cut, they were split about how much easing the central bank could afford.
After a pivot to monetary easing in August thanks to a steep slowdown in inflation, the MPC is looking past last weekend’s unrest and fear of more to come. Monetary stimulus couldn’t be more timely as business activity has contracted in all but two of the past 12 months, according to the Markit Egypt Purchasing Managers’ Index.
Reiterating its message from last month, the central bank said the decision was “consistent” with achieving an inflation target of 9%, plus or minus 3 percentage points, by the end of 2020. It also repeated that future decisions remain “a function of inflation expectations, rather than prevailing inflation rates.”
The Arab world’s most populous nation has been on a mission to bring inflation under control after it devalued the currency by half in 2016 and slashed subsidies on items like fuel to curb the budget deficit and seal a $12 billion International Monetary Fund loan. Inflation rocketed to over 30% before a steep slowdown.
With annual urban inflation easing to 7.5% in August, its lowest level since 2013, Egypt offers fixed-income investors one of the most profitable carry trades in emerging markets. Egypt’s pound is the world’s second-best performer against the dollar this year, gaining almost 10%. In August, policy makers delivered a cut of 150 basis points, the first in six months and their biggest since 2017.
“It’s positive that the central bank maintains the monetary-easing momentum,” said Mohamed Abu Basha, head of macroeconomic analysis at Cairo-based investment bank EFG-Hermes. “Despite the second rate cut in the last two months, Egypt’s carry trade remains attractive given still high real yields.”
Egyptian stocks tanked between Sunday and Tuesday as foreign investors pulled money out the country following the protests. Though they’re still the world’s second-worst performers this week, down 6%, they recovered in the last two days.
--With assistance from Harumi Ichikura.
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