Ethiopia’s efforts to contain persistent inflation through monetary tightening risk placing additional strain on private-sector investment and business expansion, financial experts warn, arguing that tighter credit conditions alone cannot resolve the structural and supply-side constraints driving up prices.
The National Bank of Ethiopia (NBE) kept its benchmark policy interest rate at 16 per cent following the eighth ordinary meeting of its Monetary Policy Committee (MPC) on November 3, 2026. It also maintained its standing interest rate corridor of 13 to 19 per cent.
The decision signals the central bank’s intention to maintain a tight monetary stance while pursuing its objective of bringing annual inflation below 10 per cent.
However, experts say the effectiveness of that approach will depend on how policy decisions influence borrowing costs, banking-sector liquidity and the flow of credit to productive businesses.
Headline inflation stood at 14.9 per cent year-on-year in September 2026, down from 15.1 per cent in August and 15.3 per cent in July. Despite that moderation, inflation remains above the central bank’s target.
Non-food inflation rose to 15.1 per cent in September, driven largely by electricity tariff increases, domestic fuel price adjustments and higher household expenses. The NBE projects that headline inflation will remain in double digits over the next six months, although it expects a gradual decline.
Eyasu Theodros, a U.S.-licensed financial adviser, described the decision to maintain the benchmark rate at 16 per cent as a measured approach intended to prioritise price stability without unnecessarily undermining economic growth.
However, he cautioned against interpreting the rate hold as evidence that inflation was under control.
“The decision to maintain the policy rate should not be interpreted as a sign that inflation has been defeated or brought under firm control,” Eyasu told Capital. “The bigger question is not whether the policy rate sits at 16 or 17 per cent, but how effectively that rate actually influences commercial borrowing, household spending and corporate investment decisions throughout the real economy.”
He said monetary interventions should be assessed through their economic effects rather than changes in the benchmark rate alone.
In his assessment, the central bank faces a delicate balancing act: limiting excessive monetary expansion while ensuring that viable businesses retain access to the financing needed for investment, manufacturing and job creation.
The current policy stance follows the NBE’s decision in July 2026 to remove the 24 per cent annual credit growth ceiling imposed on commercial banks.
The ceiling was introduced as a temporary measure to restrain credit expansion while the central bank transitioned towards an interest-rate-based monetary policy framework.
Although its removal was expected to give banks greater flexibility to lend, the change has not yet produced a substantial shift in lending behaviour or significantly eased credit access for private businesses, according to the experts.
Eyasu said lifting regulatory limits does not automatically lead to a surge in lending because banks must continue to manage credit and financial risks.
“Banks must still rigorously evaluate borrower creditworthiness, capital adequacy, repayment capacity and broader macroeconomic risks,” he said. “At the same time, businesses themselves may remain hesitant to take on new debt when facing high operational uncertainty around energy tariffs, expensive imported inputs, volatile market demand and shifting foreign exchange conditions.”
The central issue, he added, is not simply how much banks are permitted to lend, but whether businesses can borrow on affordable, sustainable terms that allow them to generate positive returns.
MPC figures show that net bank deposits increased by 85.4 per cent year-on-year during the first quarter of the 2026/27 fiscal year, while total outstanding commercial credit grew by 42.6 per cent.
However, the ratio of new loan disbursements to total deposits remained broadly unchanged from the corresponding period a year earlier.
Worku Lemma, a financial-sector expert, told Capital that the latest MPC announcement did not represent an abrupt policy shift but indicated that the NBE was prepared to tighten further if inflationary pressures persisted.
“Looking at the committee’s stance, there is a clear realisation that current policy settings may not yet be sufficiently restrictive to absorb excess liquidity and suppress persistent inflation risks,” Worku said. “At a commitment level, the message is clear: monetary policy must, and will, tighten further if necessary.”
The central bank has signalled plans to introduce bank-specific reserve requirements as part of its liquidity management approach.
Under the proposed framework, the NBE would monitor individual banks’ loan-to-deposit ratios and apply differentiated reserve requirements where necessary.
Worku said this could allow the central bank to address liquidity pressures at particular institutions rather than impose uniform restrictions across the banking industry.
“This targeted approach gives the central bank a surgical tool,” he said. “Instead of applying blanket restrictions across the entire banking industry, the NBE can selectively intervene where credit growth is overheating.”
Both experts cautioned that such measures would require careful implementation to avoid restricting financing for productive sectors.
Eyasu said targeted reserve requirements should not become an additional barrier to legitimate business expansion.
“The central challenge for monetary authorities is to suppress non-productive credit growth without creating artificial bottlenecks for manufacturers, exporters and key industrial employers who rely on commercial loans for daily operations,” he said.
Worku also attributed the limited immediate impact of removing the credit ceiling to seasonal demand and the time required to process corporate loans.
He said the first quarter of Ethiopia’s fiscal year is traditionally a slower period for loan disbursements. Demand generally increases during the second and third quarters as agricultural exports and commercial activity gather pace.
“Lending demand always rises towards December, January, February and March to support pre-shipment export financing and domestic merchandise procurement,” he said. “Evaluating the success of the credit cap removal based on first-quarter data alone leads to premature and potentially misleading conclusions.”
Large corporate loans also require extensive assessments, including credit evaluations, collateral appraisals, insurance clearance and legal documentation.
While digital banking has accelerated some small-scale retail lending, Worku said major business financing remains subject to lengthy approval procedures.
“The approval process alone for large-scale corporate facilities can easily take a month or more,” he said. “The full impact of removing credit growth restrictions will only become visible over a longer timeframe.”
The experts’ concerns highlight the limitations of relying solely on monetary policy to address inflation driven partly by supply constraints.
A 2026 Ethiopian Economics Association study found that most economic experts surveyed viewed Ethiopia’s inflation as fundamentally structural and supply-driven. Respondents identified macroeconomic adjustments—particularly exchange rate reforms and birr depreciation—as leading drivers of recent price increases, followed by domestic agricultural supply shocks.
Eyasu argued that interest rate increases cannot, on their own, resolve agricultural production problems, transport constraints or external commodity price pressures.
He therefore favoured targeted liquidity management over further increases in the policy rate, warning that excessively high borrowing costs could lead businesses to postpone investment, reduce operations and cut employment.
Neither expert expects an immediate return to single-digit inflation. They said a sustained reduction would require improvements extending beyond monetary policy.
“Achieving single-digit inflation depends on a complex web of interconnected economic factors,” Eyasu said. “It requires consistent improvements in agricultural output, stable global energy prices, strict fiscal discipline by the government and reduced pressure from imported goods.”
He also stressed the distinction between slower inflation and falling prices.
“A decline in the inflation rate means prices are rising more slowly, not that goods are getting cheaper,” he said. “For families struggling with the high cost of living, true relief will only come through real income growth and price predictability.”
Worku said the NBE’s decision not to set a rigid short-term deadline for reaching single-digit inflation reflected the uncertainty surrounding the economic outlook.
As the central bank prepares for its next policy review in January 2027, the experts said it should closely monitor the composition of inflation, the effectiveness of liquidity absorption and credit flows to the private sector.
Both stressed that the transition from administrative credit controls to an interest-rate-based financial system would require stronger financial markets, prudent bank lending and close coordination between monetary and fiscal policy.
