The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) opened 2026 by cutting key interest rates by 100 basis points and reducing the required reserve ratio (RRR) for commercial banks by two percentage points.
At its meeting last Thursday, the MPC lowered the overnight deposit rate to 19%, the overnight lending rate to 20%, and the main operation and credit and discount rates to 19.5%, marking a 1% reduction across key policy rates.
Separately, the CBE’s board of directors, chaired by Hassan Abdalla, decided to reduce the required reserve ratio — the portion of deposits banks must hold with the Central Bank — from 18% to 16%.
The MPC said the decisions were based on its assessment of inflation developments and the outlook since its previous meeting on 25 December 2025.
Global backdrop remains cautious
The Committee noted that global economic growth continues to recover, supported by relatively favourable financial conditions. However, it said the recovery remains vulnerable to geopolitical tensions, uncertainty surrounding trade policies, and signs of slowing demand in some major economies.
Although inflation has generally eased in both advanced and emerging markets, most central banks have maintained a cautious easing stance as a safeguard against upside risks.
On commodity markets, the MPC said ample oil supply has helped shield markets from price shocks, while agricultural commodity prices have shown mixed trends. Nonetheless, the global outlook remains exposed to risks, particularly potential supply-chain disruptions, adverse shifts in trade policies, and escalating geopolitical tensions.
Growth moderates but remains supportive
Domestically, the MPC said preliminary estimates indicate real GDP growth of around 4.9% in the fourth quarter of 2025, compared with 5.3% in the previous quarter. Growth was driven primarily by non-oil manufacturing, tourism, and communications.
The central bank expects economic growth to average 5.1% in FY2025/2026, up from 4.4% in the previous fiscal year. It noted that output remains below full potential but is gradually converging towards it.
The current output gap, the committee said, will continue to support the projected short-term decline in inflation, reflecting limited demand-side pressures under prevailing monetary conditions.
Disinflation trend continues
On inflation, the MPC highlighted that both headline and core annual inflation declined further in January 2026, reaching 11.9% and 11.2%, respectively, down from 12.3% and 11.8% in December 2025.
This confirms the continuation of the disinflationary trend observed throughout 2025. Average headline and core inflation fell sharply to 14.1% and 12.1% in 2025, compared with 28.3% and 27.2% in 2024.
The slowdown was primarily driven by food inflation falling to its lowest level in four years, alongside a continued — though more gradual — easing in non-food inflation.
According to the committee, the decline in non-food inflation reflects recent exchange rate improvements, subdued demand under restrictive monetary policy, and better-anchored inflation expectations.
On a monthly basis, inflation has largely returned to pre-shock levels, despite a seasonal uptick in January ahead of Ramadan. The increase was partly offset by a limited decline in non-food inflation, particularly in services.
Inflation to resume downward path
The MPC said the broad-based easing in prices, coupled with a slower pace and reduced intensity of fiscal consolidation measures, signals a more favourable inflation outlook.
Based on its latest projections, annual headline inflation is expected to remain broadly stable in the first quarter of 2026 before resuming its downward trajectory over the remainder of the year. Inflation is therefore progressing towards the CBE’s target of 7% (±2%) on average in the fourth quarter of 2026.
The anticipated decline is supported by easing inflationary pressures, the gradual fading of previous shocks, continued containment of demand-side pressures, and an improved external position.
However, the committee cautioned that the disinflation path remains subject to risks, particularly the relatively slow moderation in non-food inflation, the potential for stronger-than-expected effects from fiscal consolidation measures, and heightened regional and global geopolitical tensions.
Policy stance remains data-dependent
In light of these developments, the MPC said cutting key policy rates by 100 basis points and lowering the reserve requirement by two percentage points was appropriate to maintain monetary conditions consistent with achieving the inflation target.
The reserve ratio cut, it added, aims to preserve the effectiveness of monetary policy transmission to financial markets and the broader economy by managing liquidity conditions within the banking system.
The committee affirmed that future decisions regarding the pace of monetary easing will remain data-driven, guided by forecasts, evolving risks, and incoming economic indicators. It stressed that it will not hesitate to use all available tools to ensure price stability and steer inflation towards its target.
