CAIRO: Egypt's central bank may cut interest rates on Thursday, taking the opportunity two days after presidential elections to give a boost to an economy damaged by social and political upheaval.
Three of six economists in a Reuters survey said they expected the bank's benchmark rates to be cut by either 25 or 50 basis points, while the rest forecast unchanged rates. Former army chief Abdel Fattah al-Sisi is widely expected to become Egypt's next president after the election that ends on Tuesday.
"The timing (of the central bank meeting) is very important (as) it comes directly after the elections," said Ahmad Telfah, chief economist at Riyad Bank. He predicted a cut of 50 basis points (bps) in the bank's 9.25 percent overnight lending rate and a 25 bps cut in the 8.25 percent overnight deposit rate. "Growth in the economy is still very low.
Annual and core inflation declined in the last month. This makes room for the bank to cut the rate on hopes to stimulate the growth rate and reduce the unemployment rate," Telfah said.
The bank has held rates steady at its last three meetings.
Egypt's economy and the pound have been under pressure since autocratic leader Hosni Mubarak was ousted in early 2011, triggering political turmoil that has driven away many tourists and foreign investors, traditionally major sources of hard currency for the country.
Egypt expects gross domestic product (GDP) to grow only around 2 percent in the fiscal year that ends in June, broadly in line with last year's rate and less than half as high as rates under Mubarak.
Growth in the Arab world's most populous nation has remained sluggish despite more than $12 billion in aid pledged from Saudi Arabia, the United Arab Emirates and Kuwait after the army ousted Islamist President Mohamed Mursi last July.
The bank has cut rates by a cumulative 150 basis points since Mursi's ouster.
INFLATIONARY PRESSURES
Another big challenge for the country's new president will be an unemployment rate that stands at over 13 percent, especially as mass protests in recent years have been prompted partly by a lack of jobs for its youth. Meanwhile core inflation, which strips out subsidised goods, and urban consumer inflation have also remained high, though they slowed in April to 9.1 percent and 8.9 percent, respectively.
Price pressures could increase again, especially if subsidies are cut and the central bank lets the pound currency weaken further, said Moheb Malak of Prime Holding. He forecast rates would stay put, though a 0.5 percent cut was possible within two months.
"Further inflationary pressures could arise if the government presses ahead with subsidy reforms and upward adjustments to petroleum products prices," he said.
The government said on Monday it planned to cut petroleum product subsidies in the coming fiscal year, according to a final budget draft.
Of the six economists polled by Reuters three predicted a rate cut.
Two forecast a cut of 0.25 percent and one of 0.50 percent in the overnight deposit rate. For the overnight lending rate, two expected a 0.5 percent cut and one a 0.25 percent cut.
Three economists expected both rates to stay unchanged.
The tumbling pound has pressured the central bank to keep interest rates high to lure funds out of foreign currencies.
To support the local currency, the bank has also been burning through foreign currency reserves, now at around $17 billion compared with around $35 billion before the 2011 uprising. It has in recent weeks allowed the pound to weaken further, narrowing the gap between the official and black market rates.
"A temporary build-up in inflationary pressures could be due on the back of renewed (pound) weakening against the dollar," Malak said.
The central bank held an exceptional dollar auction this month, pumping $1.1 billion into banks, but a persistent dollar shortage keeps the pound much weaker in the parallel market than in the official one.
The bank's discount rate and the rate it uses to price one-week repurchase and deposit operations stand at 8.75 percent.
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