The Central Bank of Egypt's headquarters in downtown Cairo (Photo: Reuters)
Egypt's Central Bank on Thursday slashed both the deposit and lending rates by 50 basis points to reach 8.25 percent and 9.25 percent respectively.
The bank's monetary policy committee has also lowered its discount rate and the rate it uses to price one-week repurchase and deposit operations to 8.75 percent.
Speaking to Ahram Online on Thursday, Dr. Aliaa El-Mahdy, professor of economics at Cairo University, said that the move is an attempt by the Central Bank of Egypt (CBE) to support the government by reducing its borrowing cost.
Last August, the CBE cut its main overnight interest rate by 50 basis points for the first time since 2009. It lowered the interest rate again in September, and then kept it the same for October and November.
Cutting interest rates was not expected, however, explained El-Mahdy.
"It hurts depositors who are now facing an interest rate that is lower than the inflation rate," she said.
In October, the inflation rate increased to 10.44 percent, compared to 10.15 percent in September, partially due to unfavourable base effects from the previous year, according to the Central Bank.
El-Mahdy explained that lowering interest rates while inflation is rising means that the banking sector will not be able to attract depositors.
Nonetheless, inducing consumption and lowering the interest rate is not enough to attract investors who are more interested in a positive economic outlook and political stability.
Cairo-based investment bank Beltone Financial said that it had expected the monetary policy committee to keep rates unchanged at Thursday's meeting.
"Internal pressures and unfavourable base effects could instigate short-term inflationary pressure, at least until the end of the second half of the 2013/14 financial year," deemed Beltone.
Cutting interest rates and inducing consumption will further pressure inflation, added El-Mahdy.