In a move reflecting a significant shift in its monetary policy, the Monetary Policy Committee of the Central Bank of Egypt decided, during its latest meeting, to cut key interest rates by 100 basis points, equivalent to 1%. This decision marks the first rate cut in a long period of monetary tightening, indicating the bank's confidence in controlling inflation and the beginning of a new phase aimed at stimulating economic activity.
Under the new decision, the overnight deposit rate was reduced to 19.0%, the overnight lending rate to 20.0%, and the central bank's main operation rate to 19.5%. The credit and discount rate was also reduced by 100 basis points to 19.5%.
Background to the decision and the economic context
This decision follows a series of difficult economic measures taken by Egypt to address significant economic challenges. Over the past two years, the Egyptian economy has faced unprecedented inflationary pressures, driven by global factors such as the repercussions of the COVID-19 pandemic and the war in Ukraine, in addition to domestic factors. To combat this record-high inflation, the Central Bank adopted a tight monetary policy, repeatedly raising interest rates to curb prices and attract foreign investment in debt instruments (hot money).
This policy was part of a broader economic reform program that included the complete liberalization of the Egyptian pound's exchange rate in March 2024, which helped eliminate the parallel currency market and unify the exchange rate. These measures, while difficult in the short term, helped restore investor confidence and secured a large-scale financing package from the International Monetary Fund and other international partners, providing significant dollar liquidity to the economy.
The importance of the decision and its expected impact
The decision to cut interest rates is of great importance on several levels:
- At the local level, the decision is a significant boost for the private sector and businesses, as it reduces borrowing and financing costs, encouraging the expansion of existing investments and the launch of new projects. This is expected to positively impact economic growth rates and create new job opportunities. It also eases the burden on consumers who rely on consumer loans.
- At the investment level: The decision sends a positive message to local and foreign investors that the Egyptian economy is entering a phase of stability and growth after the correction period. Although the interest rate cut may reduce the attractiveness of short-term debt instruments, macroeconomic stability and improved growth prospects are more important factors for long-term foreign direct investment.
- At the regional and international levels, this decision reinforces Egypt's image as an investment destination capable of managing its economic policies flexibly and adaptably to changing circumstances. International partners and financial institutions are monitoring these steps as evidence of Egypt's commitment to its reform program and achieving sustainable stability.
The Central Bank stated that the decision reflected the committee's assessment of the latest inflation rates and its future projections, which indicated a downward trend. However, the bank affirmed that it will continue to monitor all economic developments and will not hesitate to utilize all available tools to maintain price stability in the medium term.
