Opinion | Is now the right time to cut reserve requirements?
The reserve requirement is one of the central monetary-policy instruments used by central banks to regulate liquidity and safeguard financial stability. In Egypt, it represents the share of bank deposits that the Central Bank of Egypt (CBE) requires supervised commercial banks to hold as non-interest-bearing reserves. By setting this ratio, the CBE directly influences banks’ lending capacity and the overall resilience of the financial system.
Typically, the CBE raises the reserve requirement during periods of elevated inflation to absorb excess liquidity and contain price pressures. Conversely, when inflation moderates and moves closer to target, the ratio may be reduced to support credit growth and economic activity.
Any decision to lower the reserve requirement depends on several fundamental conditions, foremost among them a sustained decline in inflation and the stability of medium-term inflation expectations. Policymakers must be confident that core inflation is firmly under control and that expectations among households and businesses are well anchored around the target.
Central banks therefore tend to approach such a step with caution. A reduction from the current 18% level back to the previous 14%, for example, would release an additional 4% of banks’ total deposits for lending or investment. This would require strong assurance that the newly injected liquidity would not reignite inflationary pressures. At the same time, a lower reserve requirement would give banks greater flexibility in pricing loans and financial products, support profitability through expanded lending, and potentially allow part of the cost savings to translate into improved returns for depositors, thereby encouraging higher savings.
Despite these potential benefits, it may still be premature for the CBE to restore the reserve requirement to 14% or even to begin a gradual reduction at this stage.
Cutting the reserve requirement is a double-edged sword. Injecting a sizeable amount of liquidity into the system could have a stronger-than-intended impact on market conditions, complicating efforts to keep future inflation in check. This risk explains why central banks often prefer to rely on interest rates, which offer a more flexible and finely calibrated policy lever.
Any move in this direction would need to be carefully sequenced and could require a phased approach. Timing would be critical, and it may be more prudent to wait until inflation has stabilised at decisively lower levels before proceeding.
In my view, a reduction in the reserve requirement is more likely to be considered during the latter half of the monetary-easing cycle, once inflation is clearly converging towards target and macroeconomic conditions are more firmly anchored.
Ultimately, a cut in the reserve requirement would represent a meaningful policy shift, but one that demands precise timing and rigorous analysis. Acting too early risks doing more harm than good. For now, patience and a continued focus on broader economic stability appear to be the wiser course.
Mohamed Abdel Aal – Banking expert
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