Ethiopia Tightens Monetary Policy
Ethiopia's Central Bank Raises Policy Rate to 16%, Lifts Credit Cap Amid Rising Inflation
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Key Points
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NBE introduced a targeted reserve requirement framework that ties banks' reserve ratios to their loan-to-deposit ratios, effectively penalizing lenders with higher loan growth relative to deposits while giving better-capitalized banks more room to extend credit.
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Exporters' FX surrender requirement was cut from 50% to 30%, and the foreign-exchange commission was reduced from 2.5% to 1.5%, aimed at easing import costs and improving FX liquidity in the formal banking system.
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The central bank scrapped the 24% annual credit growth cap, signaling a shift toward a market-led monetary framework while indicating that policy rates and liquidity management will continue to constrain lending as needed.
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Inflation rose to 13.4% in May 2026, with external price pressures from global oil disruptions linked to the US–Iran conflict driving higher fuel, transport, and production costs.
Ethiopia's central bank raised its key policy rate to 16% from 15%, the first hike since July 2024, and scrapped the 24% annual credit growth cap on commercial banks, according to Fidel Post. The moves come as inflation jumped to 13.4% in May 2026, up sharply from 9.7% in December 2025.
The National Bank of Ethiopia's Monetary Policy Committee said it is shifting toward a more market-based approach to managing lending and prices, according to Businessfront. Policy rates, reserve requirements, and a new liquidity tool will now do the work that the blunt credit cap once did.
Why Inflation Forced the Bank's Hand
Inflation climbed fast this year. It sat at 9.7% in December 2025, then surged to 13.4% by May 2026, according to Businessfront. Officials pointed to rising global oil prices, driven partly by disruptions tied to the US–Iran conflict, as a key driver. Higher fuel costs pushed up transport and production prices across the economy.
The central bank said it expects inflation to ease later in the year. But it warned that prices will likely stay in double digits for several more months, according to Frontier Africa Reports. That cautious outlook explains why the bank chose to tighten rather than hold steady.
Credit Cap Scrapped, But Lending Still Controlled
The 24% credit growth ceiling is gone. But that does not mean banks can lend freely. The central bank replaced the cap with a smarter tool, according to Fidel Post. Banks with high loan-to-deposit ratios — meaning they lend out a lot relative to what they hold — must keep more cash in reserve. Banks that lend more carefully get more room to grow.
This new framework is called a targeted reserve requirement. It links each bank's reserve ratio to its own lending behavior. Lenders that grow too fast relative to deposits face a penalty in the form of higher reserve costs, according to TradingView. The goal is to discipline lending without imposing a single rigid cap on everyone.
Exporters Get FX Relief as Rules Ease
The central bank also loosened rules on foreign exchange. Exporters used to hand over 50% of their hard currency earnings to the banking system. That requirement has been cut to 30%, according to Frontier Africa Reports. The change is meant to make exporting more attractive and bring more dollars into formal banks.
The bank also cut the foreign-exchange commission from 2.5% to 1.5%. That reduction should lower costs for importers who buy goods using foreign currency. Together, both changes aim to ease pressure on businesses squeezed by high import costs and tight FX supply, according to Businessfront.
A Broader Shift Toward Market-Led Monetary Policy
The rate hike and cap removal are part of a bigger reform push under Prime Minister Abiy Ahmed, according to TradingView. Ethiopia has been moving away from direct government controls on credit and toward tools that work through market signals — like interest rates and reserve ratios. This mirrors how most major central banks operate.
The shift is significant for a country that long relied on directed lending and administrative ceilings to manage its financial system. Analysts see the new framework as a step toward deeper financial market development. Still, with inflation above 13%, the central bank made clear it will keep conditions tight until prices come down, according to Fidel Post.
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