.Egypt has been following this rule religiously for the last couple of years. The Central Bank of Egypt (CBE) has introduced an aggregate of a 19 per cent increase in interest rates since 2022 to face spiralling inflation that hovered in some months at around 35 per cent.

The CBE has kept the rates at their highest-ever level of 27.25 per cent on deposits and 28.25 per cent on loans for the last six consecutive meetings. The high rates have not only helped contain inflation but have also supported the Egyptian pound, which went through several devaluations, the last of which was in March 2024 when it lost 60 per cent of its value against the dollar.

Thanks to the stabilisation of the exchange rate, inflation hit 24.1 per cent in January, confirming the downward trend that began last September.

Now that the inflation rate is cooling down and analysts expect it to reach the one-digit level by the end of this year, observers believe the CBE will opt to lower interest rates in its coming meetings, the first of which will be on 20 February.

“Due in part to base effects, inflation should fall significantly from February 2025, averaging 19.8 per cent for fiscal year 2025 as a whole and around 10 per cent for that of 2026,” Pascal Devaux, a Middle East and North Africa (MENA) and Balkans economist at the French bank BNP Paribas said.

A base effect means that if the inflation rate was high in the corresponding period of the previous year, this will automatically give a low rate of inflation now.

Devaux’s expectations are seconded by the UK-based firm Capital Economics, which expected in a report released last week that inflation in Egypt should slow back to a single-digit pace by April.

“The CBE has stated that it is turning its attention to the start of the monetary loosening cycle, and a rate cut now seems just a matter of time. We currently expect the first rate cut to be delivered in April, but we aren’t ruling out officials firing the starting gun in February’s meeting,” noted the report, which projected six per cent reductions in interest rates this year, taking the overnight deposit rate to 11.25 per cent.

With inflation falling, keeping interest rates high for too long could become an unjustified burden on economic activity, said Mona Bedair, chief economist at the Al Baraka Bank.

She explained that high interest rates overburden the private sector as borrowing the money needed to finance operations becomes costlier. Also, the presence of a high yield on deposits and saving certificates discourages private-sector players from injecting investments into relatively lower-yielding production activities.

The continuous decline in the percentage of loans acquired by the private sector out of total loans, which fell from 70.6 per cent in 2016 to 45.8 per cent by May 2024, is evident.

“A gradual rate cut would boost real credit growth, ease financial pressures on companies, and support investment recovery, without leading to a renewed wave of inflation,” Bedair told Al-Ahram Weekly.

With the government expanding its local borrowing through sovereign bills and bonds offerings, high interest rates are translated into billions of pounds in obligations to pay the yields on these securities. Some put the cost of a one per cent increase in interest rates on the state budget at around LE30 billion.

Officials stated in November that the Ministry of Finance intends to increase the overall issuance of domestic debt instruments during the fiscal year 2024-25 by about 32.8 per cent, bringing the value of expected sovereign bills and bonds issuances to LE2.7 trillion compared to LE2 trillion during the previous fiscal year.

The ministry estimated the average interest rate on local debt instruments, namely government bills and bonds, during the current fiscal year at 25 per cent, compared to 18.5 per cent during the last fiscal year.

Meanwhile, a poll of 10 economists and analysts conducted by Reuters suggested that the CBE will keep overnight interest rates unchanged during its 20 February meeting as monetary policymakers look forward to a clearer decline in inflation before cutting interest rates.

Six analysts expected the CBE to keep interest rates unchanged, while three expected them to be reduced by one per cent. One analyst expected them to be reduced by two per cent.

Bedair wants to see the CBE grasp the opportunity to lower interest rates now, as while the US central bank the Federal Reserve and other major central banks have already started cutting rates, there are signs that the pace of easing may become more conservative in the coming months, especially as inflation declines in some advanced economies slow.

“If the CBE delays its move, it may find itself in an environment of renewed pressure on global interest rates, or a decline in investor appetite for emerging markets, which will narrow the scope for a risk-free rate cut,” Bedair said.
 

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