VZCZCXYZ0011
RR RUEHWEB

DE RUEHEG #1201 1790857
ZNR UUUUU ZZH
R 280857Z JUN 09
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC 2988
INFO RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS CAIRO 001201 
 
SIPDIS 
 
STATE FOR NEA/ELA 
 
E.O. 12958:  N/A 
TAGS: ECON EINV EFIN PGOV EG
SUBJECT:  CENTRAL BANK CUTS RATES, BUT SOME BANKS KEEP DEPOSIT RATES 
STEADY 
 
REF:  A. CAIRO 476 
      ¶B. CAIRO 534 
      ¶C. CAIRO 1020 
      ¶D. CAIRO 282 
 
¶1. (U) Key Points 
 
-- The Central Bank of Egypt (CBE) cut interest rates for the fourth 
time this year. 
 
-- Several major Egyptian state and private banks responded by 
lowering their lending but not deposit rates. 
 
-- The CBE will continue to monitor inflation and growth rates 
before another interest rate decision on July 30. 
 
-- The CBE maintains a cautiously optimistic outlook on signs of 
economic recovery. 
 
¶2. (U) The Central Bank of Egypt (CBE) cut its overnight lending 
rate, deposit rate, and the discount rate by 50 basis points each at 
the June 18 meeting of its Monetary Policy Committee (MPC). 
Following this cut, the overnight deposit and lending rates stand at 
9% and 10.5% respectively, with the discount rate at 9%. This is the 
fourth time that the CBE has cut interest rates in as many meetings 
this year, after having raised them last year to combat soaring 
inflation rates. The deposit rate is now the lowest it has been 
since March 2008. The monetary easing cycle began on February 12, 
when rates were cut by 100 bps (reftel A). That was followed by cuts 
of 50 bps after both its March 26 (reftel B) and May 14 (reftel C) 
meetings. 
 
¶3. (U) In a significant but not unprecedented development, several 
of Egypt's largest banks responded to the CBE decision by cutting 
their lending but not their deposit rates. In a poll of 24 top banks 
conducted by Egypt's leading financial daily, Al-Mal, seven banks, 
including the National Bank of Egypt and other state banks, kept 
their deposit rates firm, as 11 waited to make a decision. Only six 
banks followed the CBE's lead and lowered their deposit rates right 
away. Officials at banks that kept their deposit rates steady cited 
a desire to continue attracting depositors, particularly small 
deposits. At banks that described their status as "waiting," some 
officials explained to that they wanted to monitor the market's 
reaction to the interest rate cuts before making a firm decision. 
Although banks are typically quicker to adjust deposit rates than 
lending rates in response to CBE decisions, recent low deposit 
growth likely influenced some banks either to remain firm or to wait 
to make a decision.  Annual growth in local currency deposits has 
been dropping, reaching 7.4% in April 2009, down from its peak of 
27.7% growth in March 2008. 
 
¶4. (U) In its statement, the MPC noted that headline CPI inflation 
is now at 10.2% year-on-year, a 17-month low.  The MPC statement 
noted that CPI has declined 13.4 percentage points since peaking at 
23% y-o-y in August 2008 and that domestic inflation on foodstuffs 
has fallen from 31% that same month to 12.5% in May 2009. The 
statement also cited slower domestic growth as a result of the 
global financial crisis, which has dragged down GDP growth in Q3 
2008/9 (Jan-Mar 2009) to 4.3% compared to 7.1% in Q3 2007/8. The CBE 
remains skeptical of signs of a quick recovery. It noted in its 
statement that although indications abound that the worst of the 
global downturn are over, it agreed with predictions that the global 
economy would recover slowly and gradually in 2010. 
 
¶5. (U) The MPC's next regularly scheduled meeting will be July 30. 
Some analysts predict that the CBE is nearing the end of its easing 
cycle and is unlikely to cut rates a fifth time unless the Egyptian 
economy deteriorates further. However, many analysts did not foresee 
the most recent interest rate cut, citing positive monthly inflation 
rate changes, signs of possible domestic recovery and stable money 
supply growth. In its statement, the CBE indicated that it would 
continue to act to contain the effects of the global economic 
crisis, "provided that they do not conflict with the price stability 
objective," which remains the CBE's top priority (reftel D). A 
forthcoming World Bank report citing macroeconomic and price 
instability as top impediments to investment in Egypt is likely to 
reinforce these concerns. This summer, prices are likely to continue 
rising with still-robust demand, which the coming month of Ramadan, 
beginning August 21, will push up further. How quickly prices rise 
over the next month may provide an indication of the likelihood of 
further rate cuts at the end of July. 
 
SCOBEY