Fitch Ratings expects the Central Bank of Egypt to begin its monetary easing cycle in its meeting tomorrow, with a rate cut ranging from 100 to 200 basis points.
This expectation is due to the continued decline in inflation rates, which reached 24% in January 2025, compared to 35.7% in February 2024, with a further potential decrease in February 2025 due to the strong base effect.
Fitch predicts that inflation will slow down to 10.6% by mid-2026, supported by the overall stability of the currency, despite future reductions in fuel subsidies and increases in some administered prices.
It is also anticipated that interest rates will be cut by about 10% over the next twelve months, assuming there are no external shocks.
Fitch expects the net interest margins of Egyptian banks to remain flexible in response to large interest rate cuts that the Central Bank of Egypt is likely to announce this year.
Indicators Decline
The agency predicts that performance indicators will begin to decline in 2025 after reaching high levels in recent years. However, it expects profitability to remain strong and outperform the averages for the period from 2017 to 2023.
It pointed out that net interest margins remained resilient during the last monetary easing cycle (2018-2021), despite a total rate cut of 10.5%. The interest margins in the sector decreased by only 40 basis points from their peak in 2020.
Banks directed liquidity toward high-yield government bonds to mitigate the impact of lower short-term yields on sovereign securities and benefited from reduced financing costs.
It noted that more than three-quarters of customer deposits in Egypt earn interest, and these deposits are typically re-priced downwards when the central bank cuts interest rates.
It also highlighted that the net interest margin for the sector increased by about 140 basis points in the first half of 2024 compared to the same period last year and is expected to expand further due to increased treasury bill yields, which rose by 230 basis points in the second half of 2024.
Fitch stated that with the expected interest rate cuts in 2025, there would be some pressure on the net interest margins, as the banking sector is sensitive to short-term interest rate declines due to positive gaps in re-pricing.
Positive re-pricing gaps indicate that assets being re-priced are greater than liabilities.
The agency expects banks to adopt the same liquidity strategy they applied in the previous easing cycle in 2025, increasing their exposure to treasury bonds to protect net interest margins from the decline in treasury bill yields and one-day deposit auctions at the central bank, which will decrease with interest rate cuts.
