Egypt cuts prime rate to 8.5%

The Egyptian central bank reduced its benchmark interest rate for the fifth time this year to its lowest level since November 2006 as economic growth slowed and the inflation rate fell.

The overnight deposit rate was cut by half a percentage point to 8.5 percent and the overnight lending rate was reduced by a similar margin to 10 percent, the Cairo-based bank said in a statement on its Web site.

“The cut was in line with expectations,” said Simon Kitchen, an economist at Cairo-based EFG-Hermes Holding SAE, Egypt’s biggest publicly traded investment bank. “We still think inflation pressures are to the downside and the outlook for growth is below potential.”

Economic growth in the most populous Arab country probably slowed to 4.7 percent in the fiscal year through June, Finance Minister Youssef Boutros-Ghali said on July 5. That compares with an average of 7 percent in the previous three years. The central bank has now reduced the overnight deposit rate by 3 percentage points this year to spur demand and investment.

The impact of the last cut in June was blunted as the majority of commercial banks did not lower their rates.

The central bank said its projections “point to a further softening” of economic growth. “Risks to the domestic growth outlook continue to be on the downside while inflationary pressures are subsiding,” it said.

‘Below Potential’

The International Monetary Fund said on July 27 that economic activity in Egypt was expected to continue to weaken this fiscal year and growth was likely to remain “below potential” at about 4 percent. Boutros-Ghali said the economy may grow almost 5 percent this fiscal year.

“Although month-on-month growth in exports and Suez Canal receipts may indicate that the worst is now behind us, we are not yet convinced that these constitute credible signs of an imminent rebound,” Alia Moubayed, a London-based senior economist for Barclays Capital, said in an e-mailed statement before the announcement. She had forecast a half-point cut.

Suez Canal receipts, a main source of foreign currency revenue, grew to $348.2 million in June from $342.4 million in the previous month, according to government figures. Exports increased 3.8 percent to $10.5 billion in April, the government has said.

Source: Bloomberg