The National Bank of Ethiopia (NBE) has completely lifted its temporary credit growth restrictions on commercial banks while simultaneously raising its central policy interest rate by one percentage point to 16 percent. Announcing the decisions following its Monetary Policy Committee meeting, the central bank stated that the removal of the credit cap marks a successful transition to a market-led monetary framework rather than a loosening of its strict monetary stance.
To mitigate potential inflationary pressures from unrestricted lending, the NBE introduced a new targeted reserve requirement framework. Under this system, the central bank will monitor individual commercial banks’ loan-to-deposit ratios to curb excessive credit expansion. This aggressive tightening follows a rebound in headline inflation to 13.4 percent, driven by rising global oil prices and transport costs stemming from international geopolitical conflicts.
In a bid to bolster export competitiveness and ease import costs, the central bank also adjusted key foreign exchange regulations. The mandatory FX surrender requirement for exporters was slashed from 50 percent to 30 percent, allowing businesses to retain more foreign currency. Additionally, the bank reduced its foreign exchange commission rate from 2.5 percent to 1.5 percent to limit the impact of transaction costs on local prices.
Despite external economic headwinds, the committee highlighted robust domestic performance, noting that Ethiopia’s economy expanded by 9.2 percent in the previous fiscal year. Comprehensive macroeconomic reforms initiated since 2016 have yielded a surplus in the overall balance of payments, narrowing the current account deficit and pushing national foreign exchange reserves to 20 times their pre-reform levels.
Looking ahead, the central bank projected that while inflation is expected to ease late next year, it will likely remain in the double digits for the next six months. The NBE reaffirmed its commitment to utilizing indirect monetary instruments to maintain macro-financial stability and is scheduled to reconvene to review these policies.