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UPDATE 2-Egypt cbank slashes rates to help economic growth

Fri, Feb 13 2009, 11:07 GMT
http://www.afxnews.com

By Alaa Shahine

CAIRO, Feb 13 (Reuters) - The Egyptian central bank has slashed its key overnight interest rates by 100 basis points and said on Friday it would act to support economic growth provided this won't conflict with price stability.

The bank's Monetary Policy Committee (MPC), which last lowered rates in April 2006 according to Reuters data, said in a statement its decision was due to falling inflation and an expected economic slowdown.

The move, the largest cut since 2005, brought overnight interest rates to 10.5 percent for deposit and 12.5 percent for lending. Several analysts had expected the bank to cut rates by 50 basis points.

"It speaks to their worry about a decline in economic activity," said Shain Vallee, emerging markets strategist at BNP Paribas in London.

The government said this week annual economic growth slowed to 4.1 percent in October-December quarter of the 2008/09 fiscal year, from 7.7 percent in the same period a year earlier as revenues from the Suez Canal and manufacturing took hard hits.

Annual inflation in urban areas of Egypt also fell to 14.3 percent in January, the lowest level in 10 months, largely due to base effects and a 0.5 percent decline in food prices.

"The MPC will continue to take the necessary measures to contain the adverse effects of the global economic turmoil on the domestic economy provided that they do not conflict with the price stability objective," the statement said.

Finance Minister Youssef Boutros-Ghali said last week revenues from all vital economic sectors such as tourism, exports and the Suez Canal were falling in the face of the global financial crisis.

Some analysts said the impact of monetary policy decisions on the economy was still weak, casting doubt on how effective a large cut in interest rates would have on growth.

Reham El-Desoki, a senior economist at Beltone Financial investment bank in Cairo, said the effect of interest rate movements depends on whether banks will be "more flexible with their lending rates, rather than with deposit rates".

"Banks usually maintain a wide spread between lending and deposit rates, with monetary changes reflecting mostly on deposit interest rates," she said.

Prime Minister Ahmed Nazif said last week the ratio of loans-to-deposits at Egyptian banks was a high 54 percent.

Vallee said the central bank's decision to lower rates by 100 basis points, would "limit the appetite of foreign investors to buy local currency paper". On the other hand, he said it would also reduce the borrowing costs of the government.

Turker Hamzaoglu, emerging markets economist at Merrill Lynch, said he expected the central bank to continue lowering rates to 9 percent for deposit and 11 percent for lending by June 2009.

The bank is also expected to let the Egyptian pound weaken against the U.S. dollar to 5.80 pounds to the dollar by the end of 2009 from 5.5620 this week, Beltone Financial said.

Investment bank EFG-Hermes said it expects the exchange rate of the Egyptian pound to weaken to 6.10 against the U.S. dollar in the same period.

(Writing by Alaa Shahine; editing by Stephen Nisbet) Keywords: EGYPT RATES/

(alaa.shahine@thomsonreuters.com; +20 22 578 3 290/1)

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