The National Bank of Ethiopia (NBE) has transitioned to conventional monetary policy instruments to combat inflationary pressures, moving away from its long-standing traditional framework.
The central bank has reaffirmed its commitment to a disciplined and multifaceted monetary policy that utilizes market-based tools to reduce inflation to single digits while promoting economic recovery and external stability. It intends to achieve this by carefully managing the money supply through the banking sector.
During its third meeting on Monday, June 30, the NBE’s Monetary Policy Committee (MPC) evaluated recent economic trends, including inflation, production, credit growth, fiscal policy, and external trade, before recommending policy measures for board approval.
According to the MPC’s statement, broad money supply increased by 23.3% as of June 2025, while bank credit grew by 18.1%. Reserve money experienced significant growth, driven by foreign exchange accumulation from gold exports. However, lending caps have helped mitigate excessive credit growth.
On the fiscal side, the government has reduced its deficit by eliminating central bank borrowing in the 2024/25 fiscal year, thereby supporting the NBE’s monetary tightening efforts. This fiscal discipline is anticipated to help stabilize prices and sustain economic growth.
The central bank’s strategy highlights its focus on balancing inflation control with measures to ensure ongoing economic recovery and external sector stability.
Short-term interest rates remain above the NBE’s policy rate (NBR) of 15%, with 91-day Treasury bill yields reaching 17.7% in May 2025.
The interbank rate stood at 17.5%, remaining within the NBE’s target corridor. While the banking sector remains stable, some banks are encountering liquidity challenges, which are being addressed through the interbank market and the NBE’s Standing Lending Facility.
During this period, the NBE has maintained its key policy rate at 15%, with no changes to deposit, lending, or reserve requirement rates. Additionally, the central bank has announced the removal of the mandatory 20% Treasury bond purchase requirement for loan disbursements, a measure initially imposed in late 2022.
The 18% cap on bank credit growth will remain in effect until the next MPC meeting in September 2025, as previously communicated. The MPC has reiterated that the current tight monetary policy stance will continue until inflation, currently above 14%, is reduced to single digits.
To uphold this restrictive approach, the NBE has reaffirmed its commitment to utilizing a range of monetary policy tools rather than relying on direct intervention for monetary control.
The NBE announced that the Committee has agreed that the revision of credit growth caps is anticipated by September 2025, contingent upon sustained progress in controlling inflation. Importantly, this adjustment will not result in any unintended easing of monetary policy.
The NBE emphasized its commitment to utilizing a comprehensive array of market-based monetary policy tools to uphold stability.
These tools include the central bank’s policy rate, Open Market Operations (OMOs), foreign exchange interventions, and adjustments to reserve requirements.
The NBE indicated that these measures can be implemented individually or in combination, as necessary, in response to inflationary trends and monetary conditions.
A year ago, the NBE introduced its first-ever policy rate to facilitate a transition toward an interest rate-based monetary policy framework. In its latest policy statement released on July 9, 2024, the NBE reaffirmed that the NBR, currently set at 15%, will be the primary tool for signaling its policy stance and influencing broader monetary and credit conditions.
The statement further clarified that the NBR will be adjusted—either increased or decreased—based on prevailing inflationary pressures and monetary conditions, ensuring a responsive and flexible approach to economic management.
Additionally, a few months ago, the central bank issued a revised draft directive on reserve requirements to align with international standards.
This update aims to ensure that banks maintain sufficient liquidity to meet their obligations while also providing the National Bank with a mechanism to manage the money supply and control inflation.
The directive seeks to strengthen monetary policy and prudential regulation by introducing partial reserve averaging and a lagged maintenance period.
These changes are expected to enhance the efficiency of the interbank market and provide banks with greater flexibility in managing liquidity.
Moreover, to reinforce financial stability, the directive consolidates separate reserve and payment accounts into a single payment and settlement account.
Under the new directive, banks are required to hold at least 5% of their reserve base in their NBE payment and settlement account daily, while maintaining a monthly average reserve requirement of 7% of their deposit liabilities.
Recently, NBE officials announced plans to introduce new monetary instruments to maintain a firm policy stance, even as the central bank prepares to lift the credit cap in September and discontinue mandatory bond purchases by banks.
