CAIRO (Reuters) – The Egyptian central bank cut its main interest rates by a percentage point each on Thursday, the first time it has lowered them since letting the currency float freely in 2016, as inflation sinks to its lowest levels in at least a year.
The bank cut its overnight deposit rate to 17.75 percent from 18.75 percent and its overnight lending rate to 18.75 percent from 19.75 percent, it said in a statement.
Economists welcomed the move and said they expect another cut in March.
Since it allowed the pound to float freely in foreign exchange markets in November 2016, the bank has raised overnight rates by 700 basis points to combat soaring inflation.
That has generated huge demand for Egypt’s domestic debt, but it has also slowed business down by driving up borrowing costs.
“As incoming data continued to confirm the moderation of underlying inflationary pressures, the MPC (Monetary Policy Committee) decided to cut key policy rates by 100 basis points,” the bank said.
Inflation rates peaked at a record high of around 35 percent in July in the wake of energy subsidy cuts, but they have gradually eased since, falling to their lowest levels in more than a year in January.
Annual urban consumer price inflation eased to 17.1 percent in January from 21.9 percent the previous month, while annual core inflation, which strips out volatile items, fell to 14.35 percent from 19.86 percent.
“The MPC closely monitors all economic developments and will not hesitate to adjust its stance to achieve its mandate of price stability over the medium term,” the bank said.
Eight out of 10 economists polled by Reuters said earlier this week the bank would cut its key rates.
Economists said on Thursday the move would have a positive impact on the market.
“A one percent cut is a great signal for investors that the tightening of monetary policy has ended and also a conservative approach which is highly needed in order to test market activity moving forward,” Noaman Khalid, CI Capital Asset Management economist, told Reuters after the cut.
He said he expected another cut of 100 basis points at the bank’s next policy meeting, scheduled for March 29.
Egypt’s economy has been struggling since 2011 when a political uprising drove tourists and foreign investors away, but economic reforms tied to a three-year International Monetary Fund (IMF) deal signed in 2016 have led to positive economic indicators.
Reporting by Arwa Gaballa; Editing by Sami Aboudi and Hugh Lawson