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Central Bank of Egypt and Monetary Policy

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Interest Rates

The Central Bank of Egypt (CBE) has undergone significant changes in its interest rate structure over the years. Here are some key points related to interest rates and monetary policy:

Pre-1990 Interest Rate Controls

• Prior to 1990, the CBE fixed deposit and lending interest rates for banking operations, including the discount rate.
• This approach limited the flexibility of the CBE in managing monetary policy.

Post-1990 Reforms

• In 1990, the CBE eliminated all interest rate controls except the discount rate.
• The current interest rate structure is managed by the CBE to achieve its three key objectives:
  • Controlling monetary expansion
  • Stability of the Egyptian pound exchange rate against the US dollar
  • Promoting economic growth

Monetary Policy Tools

The CBE uses several tools to implement monetary policy and manage interest rates. Here are some of the key tools:

1. Reserve Ratio

• The CBE can fix and alter the minimum reserve requirement ratios that banks must maintain against their deposit liabilities.
• This tool helps control money supply in the economy.

2. Liquidity Ratio

• Commercial and investment banks (except the Housing and Development Bank) are required to maintain a liquidity ratio of 20% for local currency and 25% for foreign currencies.
• This tool ensures that banks have sufficient liquid assets to meet their obligations.

3. Open Market Operations

• The CBE can buy or sell securities representing government obligations and other fully guaranteed securities in the open market.
• This tool helps regulate money supply and interest rates in the economy.

4. Credit Ceilings

• Credit ceilings were replaced by limiting credit growth to check excessive monetary expansion.
• This tool helps prevent inflationary pressures in the economy.