As the Egyptian Central Bank is anticipated to reduce interest rates for the first time in four years, Egyptian banks are proactively offering savings products with variable returns, linked to the Central Bank’s deposit rate, rather than fixed-rate long-term certificates. This move aims to minimize the cost burden on banks should the Central Bank ease its monetary policy. Recently, the reduction in interest rates on certain investment certificates and deposits was implemented by major banks, including Banque Misr, Commercial International Bank (CIB), Qatar National Bank Alahli (QNB), and EG Bank.
Rationale Behind the Shift
The recent rate cuts by these banks are attributed to avoiding the obligation of paying high interest rates on long-term savings products for the next few years, especially when banks lack long-term investments that would yield returns higher than the current interest rates. As a result, banks are opting to reduce interest rates on savings products to align with the returns on treasury bonds. This strategic adjustment comes ahead of the Central Bank’s first monetary policy meeting in 2025, which will determine future interest rate moves.
Impact on the Egyptian Public
In Egypt, many citizens, particularly older adults, depend on bank interest for covering their living expenses due to stagnant wages. Consequently, banks typically offer savings certificates with terms ranging from one to three years, with interest rates as high as 27% annually. Additionally, deposits with durations from one week to seven years offer returns of up to 13% annually.
Potential Effects on Banks
Heba Mounir, a macroeconomics analyst at HC Securities, noted that banks’ profits will likely be gradually impacted by the expected interest rate cuts. However, she added that banks are likely to mitigate this by increasing the deployment of funds in loans.
Expectations on Interest Rate Cuts
As inflation in Egypt showed a slight dip in January, following a surge in food prices, the outlook for future interest rate decisions remains mixed. Some analysts predict that the Central Bank will cut rates, while others anticipate the rates will remain unchanged due to ongoing inflationary pressures, particularly from geopolitical tensions and global trade protectionism.
At the same time, 11 investment banks surveyed by Bloomberg’s Al Sharq show divergent opinions on the Central Bank’s policy direction. Those favoring rate stabilization argue that seasonal inflationary pressures from Ramadan, combined with unseen latent inflationary pressures from international factors, may still persist.
Shifting Bank Strategies
In preparation for a potential rate cut, Egyptian banks are leaning toward launching savings products with variable interest rates, steering clear of offering long-term savings products with fixed interest rates. Consequently, this strategic shift is aimed at reducing the financial burden in case the Central Bank decides to lower rates.
Mohamed El-Etriby, Chairman of the National Bank of Egypt (NBE), shared that his bank is awaiting the Central Bank’s decision to adjust its savings offerings accordingly. Meanwhile, it continues to offer high-yield certificates (23.5% to 27%) until further notice.
