Third Egyptian rate cut extends easing cycle

Fourth rate cut for 2019 is unlikely to dent carry trade

Egypt cut its main interest rates by a full percentage point as the lowest inflation in almost a decade allowed the central bank’s third consecutive reduction to spur investment without dimming the allure of the world’s best carry trade.

The Monetary Policy Committee reduced the deposit rate to 12.25 per cent and the lending rate to 13.25 per cent, the bank said on Thursday. Goldman Sachs sees a pause in December, followed by a total of 150 basis points of easing next year.

The Arab world’s most populous nation has been on a mission to bring inflation under control after prices were sent rocketing by a currency devaluation and subsidy cuts enacted to seal a $12 billion

International Monetary Fund loan. The future of the central bank’s easing cycle is now less clear, since inflation probably hit bottom for the year in October, reaching an annual 3.1 per cent.

“Given the continued strengthening of the Egyptian pound and barring any material changes to inflation expectations — on account of unforeseen food price volatility — in the remainder of the year, our base case remains that the central bank will be on hold in December and resume its easing cycle in 2020,” Goldman Sachs economists led by Farouk Soussa said in a report. A sharp deceleration in food costs helped fuel the slowdown.

Egypt’s fourth rate cut for 2019 is unlikely to dent the attractiveness of its carry trade, in which investors borrow in currencies where rates are low and invest in the local assets of countries where they’re high.