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Real Rate Outlier Egypt Overtakes Turkey After Inflation Tumbles

Mirette Magdy
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Real Rate Outlier Egypt Overtakes Turkey After Inflation Tumbles

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Egypt’s real interest rates are again with few equals among emerging economies after inflation plummeted to the lowest in almost seven years, offering a fresh incentive to investors in local debt looking to maximize returns.

Decelerating for the fourth consecutive month, price growth in urban parts of the country slipped to an annual 4.8% in September from 7.5% in August, the state-run CAPMAS statistics agency said Thursday. Adjusted for inflation, Egypt’s policy rate is now near 8.5%, leapfrogging peers including Turkey and Ukraine to become among the world’s highest.

With the central bank’s easing cycle in full throttle, the price letup is ensuring that Egypt’s pound stays a favorite carry trade, in which investors borrow in currencies where rates are low and invest in the local assets of countries where they are high. Inflation is now below the lower bound of the target range policy makers set for the end of 2020.

The pound on Thursday had the biggest gain since mid-September, extending a rally that’s made it the world’s best performer against the dollar this year after Ukraine’s hryvnia. Finance Minister Mohamed Maait has said a return of 3%, plus or minus 1 percentage point, would be “a reasonable real interest rate that keeps Egypt attractive.”

Food Relief

Helped by the statistical effect of a high base last year and seasonal factors, a sharp slowdown in the cost of food is among key reasons for the faster-than-forecast deceleration. Prices for food and beverages grew only 0.3% in September from a year earlier. Core inflation, the gauge used by the central bank and which strips out volatile and regulated items, slowed to 2.6% in September -- a more than 13-year-low, according to data compiled by Bloomberg.

“This is a key success factor in controlling inflation and reaching low levels,” said Radwa El-Swaify, head of research at Cairo-based Pharos Holding. “The government focused efforts this year on the supply of food in the market to control any volatility in its price, and that is why inflation has continued to be lower than expectations for several months.”

Egypt’s central bank has embarked on rate cuts that could be second only to Turkey among emerging markets this year and next, according to BNP Paribas SA. After reducing official borrowing costs by 250 basis points in the past two months, it’s likely to deliver 100 basis points of easing at its next meeting in November, said Mohamed Abu Basha, head of research at Cairo-based investment bank EFG Hermes.

Still, inflation may pick up after a few months and end the year between 8% and 9%, according to Abu Basha.

“The real interest rate will be inflated in the next three months due to the base effect,” he said. “However, investors should pay attention to the December inflation figure to assess the sustainable real rate.”

To contact the reporter on this story: 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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