June 22, 2020 / 6:45 PM / 12 days ago

Egypt seen keeping rates on hold even as inflation dips: Reuters poll

CAIRO (Reuters) - The Central Bank of Egypt (CBE) is expected to leave its main interest rates steady this week despite a decline in inflation in May and continuing economic pain caused by the coronavirus, a Reuters poll showed.

All but one of the 17 analysts polled predicted the central bank would keep rates steady at its regular monetary policy committee meeting on Thursday. The one dissenting analyst forecast a 100 bps cut.

The overnight lending rate is currently 10.25% and the overnight deposit rate 9.25%, the lowest rates since early 2016, before Egypt embarked on a three-year, International Monetary Fund-backed economic reform programme.

“The trend in inflation is favourable, at least in the short term, and a further cut will not do much for supporting economic activity at the present time,” said Pascal Devaux, an economist with BNP Paribas.

Egypt’s annual urban consumer price inflation slowed to 4.7% in May from 5.9% in April, the official statistics agency CAPMAS said. Core inflation, which strips out volatile items such as food, fell to 1.5% year-on-year in May from 2.5% in April, according to central bank data.

“More importantly, even with IMF support, the external situation in Egypt is less comfortable than before given a rising current account deficit and more uncertain capital flow. So there is a need to keep the attractiveness of the Egyptian debt for foreign investors and support EGP (the Egyptian pound currency),” Devaux said.

The coronavirus has ravaged some of Egypt’s main sources of foreign currency. The tourism industry has all but shut down since mid-March and remittances from workers abroad have slowed.

The government says tourism represents 5% of GDP, but analysts say the figure may be as high as 15% if indirect jobs and spending as well as investment are included.

The IMF last month approved a $2.77 billion package through its Rapid Financing Instrument designed to help Egypt close its balance of payments gap.

The lender’s board is scheduled to consider on Friday yet another $5.2 billion in financing under a stand-by arrangement which has already been approved at staff level.

The central bank left interest rates on hold at its last two meetings after having slashed them by 3 percentage points at an unscheduled meeting in March as a pre-emptive move to support the economy in the face of the COVID-19 outbreak.

Reporting by Patrick Werr; Editing by Catherine Evans

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