Algeria – The Bank of Algeria is betting on a more flexible monetary policy during a sensitive phase of the national economy. In a meeting of the Monetary and Banking Council, chaired by Governor Salih Eddine Taleb, it was decided to cut the interest rate by 25 basis points to settle at 2.75% instead of 3%.

The council also reduced the mandatory reserve ratio from 3% to 2%, aiming to provide additional liquidity within the banking system and support investment financing.

Data from the council shows that general inflation fell to 0.35% in July 2025, a decrease of 6 percentage points compared to the same period last year.

Annual inflation dropped to 3.14% compared to 6.12% in July 2024. Core inflation also declined from 3.92% to 2.58% during the same period.

These indicators give the central bank a wider margin to adopt an accommodative monetary policy without immediate risks to price stability.

Regarding liquidity, the broad money supply increased by 3.81% until the end of June 2025. This is mainly due to the rise in loans directed to the economy, which grew by 5.36% during the first half of the year, compared to 5.26% for the entire 2024.

This expansion in lending did not lead to significant inflationary pressures, which economists consider an indicator that liquidity remains under control despite growing demand for financing.

Economically, Algeria recorded a growth rate of 4.5% in the first quarter of 2025, driven by a remarkable recovery in non-oil sectors that jumped by 5.7% compared to 4.3% a year earlier. According to experts, this rate exceeds the average growth in North Africa and confirms that investment programs and fiscal policies have started to translate into tangible results.

Economic expert Ahmed El-Haidoussi believes the new data reflects that the Algerian economy has entered a different phase, based on controlling inflation, providing liquidity, and the strength of non-oil sectors.

He added in an interview with Al Jazeera Net: “The decline in the inflation rate to 3.14%, compared to more than 6% a year ago, along with the drop in core inflation to 2.58%, gives the Bank of Algeria a comfortable margin to adopt an accommodative monetary policy without threatening price stability.”

El-Haidoussi points out that reducing the mandatory reserve ratio from 3% to 2% provided additional liquidity to banks equivalent to about 1% of total deposits, enhancing their ability to finance investment projects, especially in renewable energy and manufacturing sectors.

International economic development advisor Abderrahmane Hadef describes the bank’s decisions as a strong boost to the banking system. He estimates that the interest rate cut and reserve ratio reduction provided additional liquidity exceeding 600 billion dinars (about 4.62 billion dollars).

Hadef told Al Jazeera Net: “This step could open the door for small and medium enterprises – which represent 90% of the economic fabric – to obtain financing after years of difficulties, and it will also reflect on individuals by reducing the cost of consumer and housing loans, contributing to stimulating domestic demand.”

However, he warned that the impact of this liquidity depends on banks changing their traditional behavior, i.e., moving away from focusing on trade and treasury financing to supporting productive projects with long terms and calculated risks.

Regarding the possibility of inflation returning due to monetary easing, Hadef confirms that the Algerian situation is different. The recent inflation was not caused by liquidity abundance but by supply disruptions, such as food, transport, and imports. Therefore, lowering the interest rate will not necessarily lead to a new inflation wave, especially amid stable domestic energy prices and continued government support.

He emphasizes that the risk of inflationary pressures remains if monetary policy is not accompanied by structural reforms that increase local production and reduce import dependency.

Despite the importance of the measures, Hadef believes Algerian banks will still face a major challenge in how to utilize the new liquidity. The lack of sufficient experience in financing industrial and technological projects may push them back to traditional sectors such as trade and real estate, which will limit the expected positive impact.

He adds that the financial system, despite its resilience due to limited openness to global markets, suffers from a weak financial market and lack of hedging tools, increasing the risks of uncontrolled credit expansion.

Hadef concludes that monetary policy, no matter how important, is not enough alone to achieve economic transformation, saying: “Diversification requires a more stable institutional and legislative framework, a transparent and flexible business environment, advanced infrastructure, and human competencies capable of meeting the needs of new sectors such as green hydrogen and digitization.”

Experts stress that the current step by the Bank of Algeria is necessary but insufficient. The positive impact will remain contingent on the rapid implementation of complementary reforms, such as:

• Enhancing local production
• Diversifying growth sources
• Developing renewable energy and manufacturing sectors

In this sense, the recent measures represent the beginning of a path rather than an end, opening the door to a less hydrocarbon-dependent economy and greater ability to diversify growth sources in new productive sectors, experts say.