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Egypt Cuts Interest Rates As Slowing Inflation Eases Worries

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Egypt cut interest rates for the first time since floating the currency at the end of 2016, starting a widely anticipated easing cycle after record-high borrowing costs helped curb inflation and attract $20 billion into local-currency assets.

Bank of Egypt

The monetary policy committee led by Gov. Tarek Amer lowered the overnight deposit rate by 100 basis points to 17.75 percent. A cut was predicted by six out of nine economists in a Bloomberg survey.

The overnight lending rate was also reduced by 100 basis points to 18.75 percent.

The central bank had raised borrowing costs by 700 basis points after it abandoned currency restrictions as it sought to control inflation and stabilize the pound. The measures helped secure a $12 billion International Monetary Fund loan, ease a crippling dollar shortage and unleash a deluge of foreign inflows into Egypt's high-yielding debt.

The rate cut signals that policymakers are shifting their attention to promoting economic growth even if it dents the allure of local-currency assets. Annual inflation, which peaked at 33 percent in July, has eased for six months in a row to 17.1 percent in January.

"The rate cut today is only the beginning," said Ziad Daoud, a Dubai-based analyst with Bloomberg Economics. "We expect inflation to keep falling, giving the central bank space to lower rates further. The main concern is whether Egypt will continue to be an attractive destination for portfolio investments, particularly if the Federal Reserve also raises rates in the coming months," he said.

The MPC said in its statement that cutting borrowing costs was in line with its target of reducing inflation to 13 percent, plus or minus three percentage points, in the fourth quarter of 2018. "Inflationary pressures have been contained, a consequence of tighter real monetary conditions," the committee said. The Market Vectors Egypt exchange-traded fund gained after the decision, climbing to $33.57 at 1:26 p.m. in New York.

Even before the central bank reduced policy rates, the yields on Egyptian one-year Treasury bills fell to their lowest rate since two weeks before the float. Yet at an average 15 percent yield, Egyptian debt still looks attractive, though some fund managers said that they may look to exit if yields drop below 12 percent.

"The carry trade in Egypt remains very attractive," said Brett Rowley, Managing Director at LA-based TCW Group, which currently holds Egyptian debt. "Egypt's undervalued currency and relatively high interest rates offer a sizable cushion against the recent pickup in global volatility."

Source: News Agencies, Edited by website team