{"id":570050,"date":"2020-03-17T04:35:06","date_gmt":"2020-03-17T04:35:06","guid":{"rendered":"https:\/\/enterpriseam.com\/egypt\/2020\/03\/17\/cbe-makes-biggest-rate-cut-on-record-to-protect-economy-from-covid-19-outbreak\/"},"modified":"2020-03-17T04:35:06","modified_gmt":"2020-03-17T04:35:06","slug":"cbe-makes-biggest-rate-cut-on-record-to-protect-economy-from-covid-19-outbreak","status":"publish","type":"post","link":"https:\/\/enterpriseam.com\/egypt\/2020\/03\/17\/cbe-makes-biggest-rate-cut-on-record-to-protect-economy-from-covid-19-outbreak\/","title":{"rendered":"CBE makes biggest rate cut on record to protect economy from covid-19 outbreak"},"content":{"rendered":"

<\/a> The CBE has made its biggest rate cut on record, saying the move is to protect economy <\/strong>from<\/strong> covid-19 outbreak:<\/strong> The Central Bank of Egypt (CBE) slashed interest rates by 300 bps during an emergency meeting yesterday, it announced yesterday evening in a statement (pdf)<\/a>. The central bank\u2019s Monetary Policy Committee (MPC) was due to review rates on 2 April, but announced what it said was a \u201cpreemptive decision\u201d that would provide \u201cappropriate support\u201d to the economy amid the global covid-19 outbreak and its economic implications.<\/p>\n

Where rates stand now:<\/strong> The CBE\u2019s overnight deposit rate fell to 9.25% from 12.15%, the first time it has been in single digits since March 2016. The bank\u2019s lending rate is now 10.25%, and the main operation and discount rates are both at 9.75%. The central bank had left rates on hold during its past two meetings, having lowered them by 450 bps between February and November last year.<\/p>\n

What the CBE said: <\/strong>\u201cThe MPC\u2019s preemptive decision provides appropriate support to domestic economic activity given the current challenging external environment, while the inflation outlook remains consistent with achieving the inflation target of 9% (+\/-3%) in 4Q2020,\u201d it said in the statement. \u201cThe MPC will continue to closely monitor all economic developments and will not hesitate to adjust its stance to achieve its price stability mandate over the medium term.\u201d<\/p>\n

CBE Governor Tarek Amer acknowledged the seriousness of the measures<\/strong>, describing it in remarks to reports last night as a \u201csacrifice to support the Egyptian economy.\u201d<\/a><\/p>\n

Amer also said<\/a> the central bank is extending the tenor of all bank loans for a period of six <\/strong>months<\/strong>. The extension applies whether the facility is held by an SME, a large corporation or an individual borrower.<\/p>\n

\u201cIt is a very bold and unexpected move,\u201d<\/strong> Radwa El Swaify, head of research at Pharos Holding, told Enterprise. \u201cThis will reflect positively on economic growth and the industrial sector and the budget deficit, and potentially on the EGX.\u201d<\/p>\n

The jury is out on whether the rate cut would stimulate new investment:<\/strong> Muharram Hilal, vice president of the Investors Union, said it is way too early<\/a> to start forecasting whether the lower interest rate environment will spark investment given the uncertainty over how the covid-19 outbreak will hit the economy.<\/p>\n

What about the hot money?<\/strong> The deep rate cut suggests the central bank has shifted focus from the carry trade to supporting the real economy, said Abou Bakr Imam<\/a>, head of research at Sigma Securities.<\/p>\n

The emergency cut is not likely to cause a significant dip in the EGP-USD exchange rate<\/strong>, especially after the US Federal Reserve on Sunday cut its benchmark rate to zero, said Hany Genena, head of research at Prime Holdings. The EGP has gradually eased against the greenback since the global crisis intensified after surging more than half a pound during the first seven weeks of the year. The currency remained steady at 15.69 yesterday, having dropped 20 piasters since its peak on 23 February.<\/p>\n

EGP debt remains \u201crelatively attractive,\u201d<\/strong> HC Securities said, but foreign bondholders are <\/strong>likely to continue offloading Egyptian debt as concerns over covid-19 grow around the world. <\/strong>The interbank market will likely pick up the slack, Monette Doss, vice president of research at HC Securities, told Enterprise. Yields on Egyptian government debt will remain \u201crelatively attractive\u201d following the rate cut, offering a 0.95% real interest rate (accounting for the 3% rate reduction and HC\u2019s forecast for 9% inflation through 2020) compared to 0% for Turkey, she said.<\/p>\n

Yields jump as investors fret over covid-19:<\/strong> Yields on nine-month and seven-year treasuries jumped during auction yesterday as investors grew more concerned about Egypt\u2019s exposure to the covid-19 outbreak. The yield on nine-month bills rose 93 bps to 15.273% \u2014 with the government selling just EGP 4.2 bn of the EGP 10.5 bn offering \u2014 and the rate on seven-year notes jumped 67 bps to 14.653% \u2014 selling EGP 1.2 bn of the EGP 3.5 bn on offer. The yield on three-month bonds fell marginally to 12.892% but the government was only able to offload EGP 92 mn of the EGP 4 bn offering after investors demanded an average yield of 15.857%. The government cancelled its EGP 4 bn auction of three-year bonds and reduced its seven-year offering by 66%, Al Mal reported<\/a>.<\/p>\n

We probably haven\u2019t seen the last of CBE stimulus: <\/strong><\/p>\n