Why Egypt's Central Banks Cut Interest Rates?

The Central Bank of Egypt (CBE) announced the interest rate cut of 2.25% on Thursday evening. 

The central bank cut interest rates by 225 basis points at its meeting, its first rate cut since late 2020. 

The move comes after inflation continued to slow, turning real interest rates positive, facilitating the CBE's decision to cut interest rates. 

Accordingly, the deposit rate dropped to 25%, the overnight lending rate to 26%, and the CBE's main operation rate decreased to 25.5%. The CBE's Monetary Policy Committee also decided to cut the credit and discount rates by 225 basis points to 25.5%.

This represents the first interest rate cut since 2020, nearly five years ago. The intervening period has seen only interest rate increases or freezes, which will have clear repercussions for the macroeconomy, depositors, and borrowers.

The interest rate cut came as a result of falling inflation and rising financing costs, as rising interest rates for years have put significant pressure on the general budget."

According to data from the financial statement for the upcoming budget, interest rates in Egypt have witnessed a significant and gradual increase since 2020. The interest rate as a percentage of state expenditures jumped from 35.8% in the 2020/21 fiscal year to 50.2% in the fiscal year beginning July 1. This means that more than half of the budget goes to interest.

Cutting interest rates saves the state 75 billion Egyptian pounds for every 1%. That is, a 225 basis point interest rate cut saves approximately 170 billion Egyptian pounds."

However, the drop in interest rates will have a negative impact on holders of bank certificates, which are Egyptian savings instruments used by individuals to improve their income and help them cope with inflation, which has been declining significantly for about a year.

By contrast, those who borrow will be among the beneficiaries of the interest rate cuts in Egypt, primarily real estate developers and non-banking financial institutions such as consumer finance and leasing companies and their clients.

Ultimately, the relationship between inflation and interest rates remains directly proportional. Despite the beginning of a decline in inflation in Egypt, it is likely to rise again due to several factors, including the increase in fuel prices in Egypt in agreement with the International Monetary Fund, the regional unrest in the Middle East, and the trade war escalating globally due to Trump's tariffs.