Egypt’s interest rate cuts, easing inflation to support bank revenues: Moody’s

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Egypt’s lower interest rates and easing inflation are set to encourage capital spending by businesses that have refrained from making such investments in the past, Moody’s Investor Service said in a sector note on Monday.

“With inflation now below the CBE's 9 percent target, we expect additional rate cuts over the next year, which will bolster business confidence and economic growth, supporting increased credit growth and business opportunities for banks, which will outweigh pressure on their net interest margins,” Moody’s said.

As a result of a lower interest bill, the country will also see increased consumer spending through improved debt affordability and government finances – all collective developments that are expected to lift Egypt’s gross domestic product (GDP) to 5.6 percent in 2019 and 5.8 percent in 2020, Moody’s added.

Egypt’s annual urban inflation rate eased from 8.7 percent in July to 7.5 percent in August, its lowest level since 2013.

The Arab world’s most populous country has been working towards controlling its inflation rate since it floated its currency in 2016, a move that has reduced the Egyptian pound’s value by about 50 percent to the dollar.

“Banks will also benefit from increased credit growth, which we forecast will be more than 15 percent in 2020, while pressure on asset quality will remain subdued; banks' nonperforming loans-to-gross-loans ratio was 4.1 percent as of March 2019,” Moody’s said.

On September 26, the Central Bank of Egypt’s Monetary Policy Committee (MPC) cut its overnight deposit rate, overnight lending rate, and the rate of the main operation by 100 basis points to 13.25 percent, 14.25 percent, and 13.75 percent, respectively.

The discount rate was also cut by 100 basis points to 13.75 percent.

“Globally, the expansion of economic activity continued to weaken, financial conditions eased, and trade tensions continued to weigh on the outlook. International oil prices remain subject to volatility due to potential supply-side factors that include geopolitical risks,” the MPC said in the statement.

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