Reasons Behind Egyptian Banks' Interest Rate Cuts on Savings Instruments and Their Impact on Inflation
Several banks operating in the Egyptian banking sector have begun adjusting interest rates on savings instruments, particularly those with high yields, in preparation for the upcoming economic transformations.
This move comes in conjunction with expectations that the Central Bank of Egypt (CBE) may soon change its interest rate policy. As a result, banks are reevaluating their funding costs to maintain financial stability and enhance profitability.
Banks' Moves to Cut Interest Rates:
The Egyptian banking market has seen consecutive decisions to reduce interest rates on certain savings accounts and certificates. Notable developments include:
- Banque Misr reduced the interest rate on the "Super Cash Savings" account by 0.50%, bringing it down to 22.5%.
- Arab African International Bank plans to lower interest rates on savings accounts starting March 1, 2025, for the second time in 2025, with reductions ranging between 2% and 3%. The interest rate on the "E-Golden Saving" account will range from 20.75% to 24%, depending on the savings tier.
- Commercial International Bank (CIB), QNB Alahli, and Al Ahli Bank of Kuwait (ABK-Egypt) have also reduced interest rates on high-yield savings certificates by 0.50% to 1.5% as part of their strategy to manage funding costs efficiently.
Reasons for Interest Rate Cuts:
Expectations of a CBE Interest Rate Cut:
Market expectations suggest that the Central Bank of Egypt may soon reduce interest rates, prompting banks to proactively lower savings returns to prevent a significant gap between deposit interest rates and loan rates.
Reducing Funding Costs and Protecting Profits:
High interest rates on savings instruments increase banks' funding costs, affecting their ability to allocate funds for lending and investments. By reducing deposit rates, banks aim to balance their interest payouts with their revenue from various financial activities.
Declining Yields on Government Debt Instruments:
The yields on Egyptian government debt instruments have declined in certain periods, impacting banks' ability to generate high profits from treasury bonds and bills. Consequently, banks are restructuring deposit rates to maintain a reasonable profit margin.
Encouraging Economic Activity and Loan Uptake:
Lower interest rates on savings make borrowing and investing more attractive, stimulating demand for loans and fostering economic growth in key sectors such as industry, trade, and real estate.
Effective Liquidity Management:
Banks strive to manage their available liquidity efficiently to avoid excessive deposits without viable investment channels. By reducing savings interest rates, banks can redirect their liquidity into more productive investments.
Impact of Interest Rate Cuts on Inflation:
Lowering interest rates on savings instruments is a step toward stimulating economic activity by encouraging borrowing and investment. However, this could also lead to higher aggregate demand, potentially driving inflation if not matched by increased supply and production.
In this context, inflation in Egypt's urban areas slowed slightly in January, reaching 24% year-on-year compared to 24.1% in December. This marks the third slowdown in the past six months, despite food and beverage prices rising by 20.8% year-on-year in January, up from 20.3% in December. On a monthly basis, urban inflation rose to 1.5% in January from 0.2% in December.
Inflation is expected to continue its gradual decline throughout the year, potentially reaching 20% by the end of 2025, provided that Egypt sustains its efforts to boost foreign currency reserves and maintain the stability of the Egyptian pound against the US dollar.
Expected Effects:
The reduction of interest rates on savings is anticipated to:
- Enhance banking sector financing and increase loan uptake: Lower borrowing costs may encourage individuals and businesses to secure financing for their projects, supporting economic growth.
- Improve banks' profit margins: By reducing deposit interest costs, banks can lower their expenses related to servicing deposits, thereby increasing profitability.
- Reallocate liquidity within the banking sector toward more efficient investments: This could lead to better financial resource utilization in productive sectors.
- Support the Egyptian economy by increasing investment and spending: Stimulating borrowing and investment could create new job opportunities and enhance productivity, positively impacting the economy.
This strategic move by Egyptian banks reflects an effort to align with anticipated economic shifts, balancing savings and borrowing rates to suit the evolving financial landscape. As economic developments continue, interest rate trends will remain closely monitored, directly influencing individual and corporate decisions on savings and investments in the near future.
