Why Egypt’s Central Bank Cut Rates, Slashed Reserve Requirements?

The Central Bank of Egypt (CBE) outlined the rationale behind its latest monetary policy decisions, emphasizing that the move is designed not merely as a rate adjustment but as a calibrated step to secure a sustained decline in inflation and preserve effective monetary transmission.

The Monetary Policy Committee (MPC) said it deemed a 100-basis-point cut in key policy rates, alongside a two-percentage-point reduction in the reserve requirement ratio, appropriate to maintain monetary conditions consistent with achieving the inflation target.

According to the central bank, lowering the reserve requirement ratio aims to safeguard the efficiency of monetary policy transmission into financial markets and the broader economy by carefully managing liquidity conditions within the banking system.

The committee stressed that it will continue assessing the pace of monetary easing based on evolving forecasts, incoming data, and surrounding risks.

At its meeting on Thursday, the MPC reduced the overnight deposit rate to 19.0%, the overnight lending rate to 20.0%, and the main operation rate to 19.5%. The discount rate was also lowered to 19.5%. In parallel, the reserve requirement ratio that banks must hold at the central bank was cut from 18% to 16%.

The decisions reflect the committee’s assessment of the latest inflation developments and outlook since its previous meeting.

Globally, economic growth continues to recover, supported by relatively favorable financial conditions. However, the recovery remains influenced by geopolitical tensions, uncertainty surrounding trade policies, and emerging signs of slowing demand in some major economies.

Although inflation has largely been contained across advanced and emerging economies, most central banks have maintained a cautious easing approach in anticipation of potential upside risks.

In commodity markets, ample oil supply has helped shield prices from shocks, while agricultural commodity prices have shown mixed trends. Nonetheless, global prospects remain vulnerable to supply chain disruptions, unfavorable trade policy shifts, and escalating geopolitical tensions.

Domestically, the central bank’s latest estimates for the fourth quarter of 2025 indicate real GDP growth of approximately 4.9%, compared with 5.3% in the preceding quarter.

Growth in Q4 2025 was driven by positive contributions from non-oil manufacturing, tourism, and telecommunications. The central bank expects average economic growth of 5.1% during fiscal year 2025/2026, up from 4.4% in the previous fiscal year.

Despite this improvement, output remains below its maximum capacity, although it is gradually approaching it. The current output path is expected to continue supporting the anticipated short-term decline in inflation, reflecting still-limited demand-side pressures under existing monetary conditions.

Both headline and core annual inflation declined to 11.9% and 11.2%, respectively, in January 2026, compared with 12.3% and 11.8% in December 2025, underscoring the continued downward trend observed throughout 2025.

On average, headline and core inflation registered 14.1% and 12.1% in 2025, sharply lower than 28.3% and 27.2% in 2024.

The deceleration is primarily attributed to a drop in food inflation to its lowest level in four years, alongside a continued, albeit slower, decline in non-food inflation.

The easing of non-food inflation reflects recent exchange rate improvements, subdued demand under restrictive monetary conditions, and improved inflation expectations.

On a monthly basis, inflation has gradually returned to pre-shock levels. Although January 2026 recorded an uptick in line with the usual seasonal pattern ahead of Ramadan, the increase was partially contained by a limited decline in non-food inflation, particularly in services.

Overall, the broad-based decline in prices, coupled with the reduced pace and intensity of fiscal consolidation measures, signals improved inflation prospects in the coming period.