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Egypt fights to rekindle economy with rate cuts

Yousef Gamal El-Din | CNBC

Egypt's central bank (CBE) lowered its benchmark rate last week for the second time since the ouster of President Mohamed Morsi on July 3, and analysts said that more cuts might loom this year.

"There will be further rate cuts till the end of the year, and we are probably looking at another 100 basis points (bps)," Wael Ziada, head of research at EFG Hermes, told CNBC.

On Thursday, the central bank slashed its key interest rate by 50 bps, following an earlier 50bps cut in August. September's move was widely expected among analysts surveyed by CNBC, but it was a different story in August, which was the first cut since 2009 and took markets by surprise.

(Read more: Egypt returns $2 bln to Qatar after talks to securitise it fail)

"The rate cut is a clear signal of confidence by the CBE, and an indication of its focus on economic growth rather than inflation," Liz Martins, senior economist at HSBC Middle East, said in a research note. She added that the CBE was likely to "retain a loosening bias" for the rest of the year.

According to Egypt's statistics agency, CAPMAS, annual consumer price inflation (CPI) slowed to 9.7 percent in August, from two-year highs of 10.3 percent in July.

In the midst of sporadic nationwide violence, Egypt's growth remains tepid. In a report last month, the Ministry of Finance noted a "relative improvement" in economic output from two percent in the second quarter of 2013 to 2.2 percent in the third quarter. Still, the figure was behind the 5.2 percent achieved in the same period last year, and below the "desired levels needed to create new jobs".

The political instability since early 2011 has put tremendous pressure on the CBE's foreign currency reserves, which have decreased by close to 60 percent. Plus, the Egyptian pound has fallen, with the central bank struggling to avert a disorderly devaluation.

(Read more: Egypt's pound at fresh lows: an opportunity?)

But aid pledges of some $12 billion from the oil-rich Gulf have begun to trickle in since the establishment of a transitional government. It's given the central bank room to maneuver, although the government did return a $2 billion deposit from Qatar after failing to agree on terms. Some experts suggested that soured political relations contributed to the refund.

Even if further rate cuts occur, the impact on the Egyptian pound may prove to be modest. Since the last rates cut, the Egyptian pound has actually appreciated 1.4 percent against the U.S. dollar.

"Also we are coming from a relatively high interest rate level, and hence the downside risk to local currency remains limited," Ziada said.

(Read more: Violence doesn't shake up Egyptian stock market)

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