Early in the upcoming year, the National Bank of Ethiopia (NBE) is expected to revise the policy rate, commonly known as the National Bank Rate (NBR).
The initial policy rate, set at 15 percent, was established at the beginning of the fiscal year.
The NBE’s shift to an interest-rate-based monetary policy framework marks a significant advancement in effectively communicating its policy stance and influencing the broader monetary and credit landscape of the economy.
This rate considers the latest macroeconomic conditions, which, according to the NBE, are characterized by gradually declining inflation, slow growth in base money, and a significant slowdown in bank credit growth over the past year.
The NBE indicated that this interest-rate-based framework replaces the previous credit ceiling approach, which was intended as a temporary measure and aligns with global best practices.
Additionally, the interest rate for overnight lending or deposit facilities between the central bank and commercial banks will be based on the NBE policy rate, adjusted by plus or minus three basis points.
With the recent NBE announcement regarding modernization and restructuring, it is anticipated that this transition will proceed in an orderly manner.
According to a new proclamation passed last week, the central bank will create a monetary policy committee responsible for developing monetary policy proposals.
During the evaluation of the proclamation prior to ratification, NBE Governor Mamo Esmelealem Mihretu clarified that the committee, which will meet regularly, will recommend monetary policies for the country, including the determination of the NBR.
However, he declined to provide further details when asked by Capital about the committee’s role in updating the current NBR after the New Year.
The upcoming monetary policy committee will consist of seven members, including two monetary policy specialists who are not NBE staff. The committee will be chaired by the governor, with a vice governor serving as deputy chairperson.
The government has assured its foreign partners that it will review the policy rate at least until it approaches the actual interest rate.
According to the International Monetary Fund’s (IMF) Extended Credit Facility review released in November, the authorities committed to raising the monetary policy rate to achieve positive real terms by the first quarter of 2025 and to move away from quantitative constraints on bank lending, in line with their adoption of an interest rate-based monetary policy framework.
The review stated, “Unless inflation expectations continue to decline rapidly, rate increases will likely be needed later in the year to achieve positive real interest rates and in anticipation of the ending of quantitative restrictions.”
The policy rate will serve as the starting rate for lending from the central bank to the government or financial institutions, according to the recently revised NBE establishment proclamation.
It also noted that interest rates on government overdraft facilities would be based on the National Bank’s monetary policy rate.
Similarly, the NBE stated that it would offer short-term advances to banks at interest rates higher than the monetary policy rates.
