The National Bank of Ethiopia (NBE) has reported a significant increase in the interest rate for Treasury bills (T-bills), which has now exceeded the policy rate for the first time, marking a positive rate.
This change occurs as the NBE’s Monetary Policy Committee is set to revise the policy rate, which was established at 15% at the beginning of the fiscal year.
According to the NBE’s Monetary and External Sector Developments overview published on February 13, the interest rate for one-year T-bills has risen by 57% compared to the beginning of the budget year.
In July, the rate was 10%, but it has surged to 15.7% in just six months, representing the highest rate relative to the current inflation rate of 15.5% and the policy rate of 15%.
The recent spike in T-bill rates follows recommendations from the International Monetary Fund (IMF), which urged the central bank to adjust interest rates in order to attract more bidders and mobilize resources. The IMF emphasized the importance of maintaining positive real T-bill rates aligned with the policy rate.
In its latest report, the IMF noted that the transmission of monetary policy to T-bill rates has been limited, as weighted average issuance yields have remained at or below 10-11%, despite attempts to adjust rates to market-clearing levels.
The IMF attributed this limitation to factors such as demand from pension funds at negative real interest rates, the inclusion of T-bills in reserve requirement calculations, and historical practices of rejecting bids above 10%.
However, following the IMF’s recommendations, T-bill rates have shown consistent growth. In the latest auction held last week, the average interest rate for one-year T-bills reached 17.69%, reflecting a positive trend in light of the declining inflation rate, which fell to 15.5% in January from 17% the previous month.
The NBE’s transition to an interest-rate-based monetary policy framework marks a significant step toward aligning with global best practices. This new framework replaces the previous credit ceiling approach, aiming to enhance communication of the central bank’s policy stance and influence the broader monetary and credit landscape.
The IMF’s first review under the Extended Credit Facility (ECF) program, published in November, underscored the authorities’ commitment to achieving positive real interest rates by the first quarter of 2025 while moving away from quantitative lending constraints.
In addition to these monetary policy developments, the NBE reported a notable increase in foreign exchange (forex) trading among banks. Between October 2024 and January 2025, banks traded a total of USD 428 million in forex, with daily average sales increasing to USD 43 million in January, up from USD 22 million in August 2023.
As the NBE prepares to revise its policy rate, the recent adjustments in T-bill rates and the decline in inflation indicate progress toward stabilizing the economy and enhancing market functioning, according to experts.
