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27 August 12:00 AM

Fitch: Egypt rate cut made possible by macro stabilization

Fitch Ratings said on Tuesday Egypt's first interest rate cut since exchange rate liberalization has been made possible by an improvement in macro-economic stability, underpinned by more orthodox policy settings under the country's International Monetary Fund (IMF) program.

Fitch Ratings added that these factors were reflected in the foundation's revision of the Outlook on Egypt's 'B' sovereign rating to Positive last month. 

The Central Bank of Egypt (CBE) on 15 February cut its overnight deposit and lending rates by 100bp to 17.75% and 18.75%, respectively. Its main operation and discount rates were also cut by 100bp, to 18.25%.

The CBE had increased rates by 700bp since devaluing the Egyptian pound in November 2016. 

Headline and core inflation have fallen in recent months as the spike caused by currency depreciation and fiscal reforms subsides. Annual headline inflation dropped to 17.1% in January, down from its July peak of 33.0%.

Food price inflation, which carries a large weighting and has significant import dependence, has declined sharply from more than 40% to 16.6% yoy. Nevertheless, inflation is well above peers and remains a sovereign rating weakness. 

Fitch added "We think inflation will fall further this year but remain in double digits, averaging around 13%. This assumes that further subsidy reform in July leads to energy price increases, especially given higher oil prices. Even so, we expect the CBE to cut rates further this year (another 200-300bps) even as global rates rise, while maintaining positive real interest rates."

Since exchange rate reform, the CBE has set out to control inflation expectations. In delivering the rate cut, it said that it would "not hesitate to adjust its stance to achieve its mandate of price stability over the medium term."

The IMF indicated in December that it was broadly satisfied with the transition to a floating exchange rate regime and the CBE's efforts to contain inflation, when it completed the second review of Egypt's $12 billion, three-year program. Exchange rate reform has proved a turning point for Egypt's external finances and the economy, with growth of around 5% in the first half of the current fiscal year, notwithstanding the tight monetary and fiscal stance. Reserves have risen and the current account deficit has started to narrow. Growth and the current account will both benefit increasingly from rising domestic gas production. 


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