Market awaits reopening of banks to gauge impact of CBE's 2.25% rate cut on savings, loans

Daily News Egypt

21-04-2025

Markets are closely watching the reopening of banks on Tuesday—following the Easter and Sham El-Nessim holidays—to assess how the Central Bank of Egypt's (CBE) surprise 2.25% interest rate cut will affect savings instruments and loan products.
The CBE's key policy rates serve as the primary benchmark for short-term interest rates on the Egyptian pound. In the immediate aftermath of Thursday's decision, interest rates on floating-rate certificates and certain loans tied to the CBE's benchmark rates dropped automatically by 2.25%.
The Egyptian banking sector offers a variety of floating-rate savings certificates, most notably the National Bank of Egypt's 'Platinum' certificate and Banque Misr's 'Al-Qimma' certificate. Several floating-rate loan products are also directly affected by changes in the CBE's rates.
Mohamed El-Etreby, Chairperson of the National Bank of Egypt, said the bank's Assets and Liabilities Committee will meet this week to evaluate potential adjustments to its savings certificates following the rate cut—a position mirrored by Banque Misr in an official statement.
Market participants are also closely monitoring how the rate reduction will affect yields on government treasury bills and bonds, which could influence the level of foreign investment in these instruments.
At its meeting Thursday evening, the CBE's Monetary Policy Committee (MPC) lowered the overnight deposit rate to 25%, the overnight lending rate to 26%, and the main operation, credit, and discount rates to 25.50%. This marks the largest rate cut in over four years.
The decision was largely in line with market expectations, with 12 investment banks forecasting a cut in response to a marked slowdown in inflation. The CBE cited a sharp decline in the annual headline inflation rate as providing substantial room to begin a monetary easing cycle.
The MPC also noted that global uncertainty regarding growth and inflation has prompted central banks in both advanced and emerging economies to adopt a cautious approach toward future monetary policy moves.
While global economic growth has remained relatively stable, recent developments in international trade are expected to weigh on future forecasts due to concerns over supply chain disruptions and weakening global demand. Oil prices have dropped significantly, driven by supply-side factors and expectations of reduced demand amid ongoing trade policy uncertainty.
The MPC further highlighted that prices of essential agricultural commodities—particularly grains—have seen increased volatility due to climate-related disruptions. However, it warned that inflation remains exposed to upward risks, especially from intensifying geopolitical tensions and continued global trade fragmentation fueled by rising protectionist measures.
Domestically, the MPC reported that preliminary data for Q1 of 2025 indicates continued economic recovery for a fourth consecutive quarter, with growth surpassing the 4.3% recorded in Q4 2024. This expansion was primarily driven by non-oil manufacturing, trade, and tourism.
Despite this momentum, the MPC noted that the economy is still operating below its full potential, with output gap estimates suggesting that real activity remains constrained. Full capacity is not expected to be reached before the end of the 2025/2026 fiscal year.
The committee stated that this slack in the economy is helping to ease inflationary pressures, reinforcing expectations of a continued decline in inflation in the near term under the current monetary policy stance.
In Q1 2025, annual inflation saw a sharp drop, driven by a favorable base effect, the cumulative impact of monetary tightening, and the dissipation of earlier shocks. Headline inflation fell to 13.6% in March 2025, while core inflation dropped to 9.4%—the lowest core reading in nearly three years.
This decline was led by a dramatic slowdown in food inflation, which plunged from 45.0% in March 2024 to 6.6% in March 2025. Non-food inflation also eased, though more gradually, falling from 25.7% to 18.9%, due in part to delayed effects of previous shocks and ongoing fiscal consolidation.
Monthly inflation readings since the start of the year have begun to normalize, returning to historical patterns and signaling improved inflation expectations.
The MPC noted that the 9-point drop in headline inflation during Q1—largely in line with forecasts—has significantly tightened real monetary conditions, paving the way for the initiation of a monetary easing cycle.
Looking ahead, inflation is expected to continue declining throughout 2025 and 2026, although at a slower pace than in the Q1. This reflects the anticipated impact of fiscal consolidation and a more gradual moderation in non-food inflation. However, the outlook remains subject to upside risks, particularly if fiscal reforms exert stronger-than-expected effects. External uncertainties—including the ongoing US-China trade war and potential regional geopolitical escalations—also pose risks to the inflation trajectory.
In this context, the MPC deemed the 225 basis point cut in key policy rates appropriate to maintain a supportive monetary stance and anchor inflation expectations.
The committee reaffirmed its commitment to a data-driven, meeting-by-meeting approach in assessing the pace and extent of policy adjustments. It emphasized its readiness to act decisively, using all available tools to ensure price stability and guide inflation toward the target of 7% (±2%) by Q4 of 2026.