The Monetary Policy Committee (MPC) of the National Bank of Ethiopia (NBE) will hold its fifth meeting in the coming days. Financial analysts expect minimal changes to the current monetary policy, despite recent improvements in the country’s foreign exchange reserves, which now cover approximately 2.8 months of imports.
This upcoming meeting follows a prior session in which the committee chose not to fully lift the credit growth cap, a measure initially indicated for relaxation.
Instead, the cap was raised from 18 percent to 24 percent. Market experts widely anticipate that the MPC will maintain this 24 percent credit ceiling in the upcoming meeting.
In a recent public address, NBE Governor Eyob Tekalegn reaffirmed the central bank’s commitment to a tight monetary policy aimed at curbing inflation, which was recorded at 10.9 percent in November. The goal is to bring inflation down to a single-digit target within the current fiscal year. “We will continue to pursue the goal of achieving a single-digit inflation rate,” Governor Eyob stated.
A notable policy shift occurred in June when the MPC eliminated the mandatory requirement for banks to purchase bonds equal to 20 percent of every loan disbursement.
While this change has improved liquidity in the banking sector, analysts point out that the ongoing credit cap still encourages banks to seek alternative investments, such as government securities.
Data shows increased activity in the money market since the bond purchase rule was lifted, with both Open Market Operation (OMO) volumes and Treasury bill (T-bill) auctions experiencing significantly higher demand, leading to recent T-bill auctions being oversubscribed.
Given the declining trend in inflation and strong demand for government securities, some analysts suggest that the MPC may consider revising the National Bank Rate (NBR), currently set at 15 percent.
They argue that the high cost of borrowing, acknowledged by the government, indicates a potential need for a policy rate adjustment to stimulate credit flow.
Governor Eyob presented an optimistic view of macroeconomic stability, noting a positive current and capital account balance during the first five months of the fiscal year.
He announced that the NBE’s international reserves have already exceeded projections, reaching 2.8 months of import cover—a target originally set for the next 18 months.
This performance surpasses the benchmarks established in the 2024/25 macroeconomic reform program, which aimed for 2 months by the end of the current fiscal year.
The Governor attributed this reserve buildup to successful economic reforms, a significant rise in export earnings—particularly from gold—and strict measures against illegal remittance activities.
He urged banks to participate judiciously in the bi-weekly foreign currency auctions, aligning their bids with actual payment needs based on a published three-month schedule, and to adapt their foreign currency management practices according to new capital adequacy directives.
In a forward-looking statement, Governor Eyob hinted at potential government measures to incentivize the repatriation of foreign currency held abroad, signaling a policy shift aimed at building public confidence and attracting inflows.
Experts have indicated to Capital that the upcoming MPC decision is anticipated against a backdrop of improved external reserves and moderating inflation, yet persistent constraints on private sector credit growth.
