CAIRO: Following the 75 basis point cut in the US Federal funds rate on Tuesday, local banks in Egypt slashed interest rates on US dollar deposits, reducing them to 2.5 percent, in some cases, on long-term deposits.
“The Egyptian pound exchange rate against the US dollar moved slightly from LE 5.5416/USD to LE 5.5340/USD, due to the increased demand from foreign investors selling some shares in the Egyptian stock exchange, said Beltone Financial.
The Federal Reserve s biggest emergency interest rate cut in more than two decades took a bite out of the US dollar on Wednesday, which depreciated against several currencies, among which was the Egyptian pound.
The US dollar fell more than 1 percent against the euro – the biggest daily decline in at least a year – after the Fed sought to soothe fears of a recession by cutting its benchmark lending rate by 75 basis points to 3.5 percent.
“Any depreciation in the value of the dollar [in the coming period] will be the result of the [underlying] problems in the US economy and [fears of a US recession and its impact on the global economy], explained Reem Mansour, senior economist at HC Securities Brokerage.
An increased demand for foreign exchange elevated domestic currency liquidity and led banks to cover over 90 percent of deposits auctions, worth LE 10 billion, offered by the Central Bank of Egypt (CBE) on Tuesday.
According to Beltone Financial’s data, rates ranged between 8.755 and 8.82 percent. Initially, banks were discouraged from covering a majority of the auctions lately, due to the funds being taxable and non-tradable on the secondary market.
Financial experts are skeptical as to whether a further drop in the value of the dollar will have tangible effects on the national economy. One likely scenario is that it will lower prices of imports from the US but at the same time cause prices of Egyptian exports to American markets to soar.
“Imports from the US [19 percent] will become cheaper. However, Egyptian exports to the US [around 30 percent] will become more expensive if the dollar weakens, Mansour pointed out. “Still, that does not [necessarily] mean that exports will decrease in volume because there are factors other than price that affect exports.
The Fed’s move has left Egyptian financial institutions at odds as to whether the CBE will keep rates unchanged or lower them.
“There is no reason for the CBE to [replicate the Fed’s move]. The US made interest rate cuts before, and the CBE did not follow them, explained Mansour.
Last September, Egypt’s Monetary Policy Committee (MPC) kept its key overnight interest rates unchanged at 8.75 percent for deposits and 10.75 percent for lending, despite decisions to cut the Fed’s interest rates by 50 basis points to 4.75 percent.
“Since our inflation rate has [recently] been going down, there is no reason to change our interest rate, she added. “The GCC [Gulf Cooperation Council] countries, unlike Egypt, have their currencies pegged to the dollar, so they have to follow the cuts. But here in Egypt, we don’t have this kind of urgency.
Gulf states face an uphill battle to control inflation and conduct monetary policy, as more US rate cuts are likely to follow. Gulf Arab economies are experiencing high inflation, but central banks have limited options as the peg forces them to track US monetary policy at a time when the Federal Reserve is cutting interest rates.
Meanwhile, in Egypt, the MPC is due to convene early next month to announce the CBE’s decision on interest rates.