The National Bank of Ethiopia (NBE) has removed the credit growth cap imposed on commercial banks and raised its policy interest rate by one percentage point as part of measures intended to maintain tight monetary conditions and contain inflation.
The decisions were approved by the NBE Board following recommendations made during the seventh regular meeting of the Monetary Policy Committee.
The central bank said the credit cap had been introduced as a temporary measure during Ethiopia’s transition toward an interest rate-based monetary policy framework. According to the NBE, the cap has achieved its intended purpose and will now be replaced by indirect monetary policy instruments.
To offset the potential expansionary effect of removing the cap, the NBE increased its policy rate by one percentage point while retaining the existing plus-or-minus three percentage point interest-rate corridor.
The NBE also announced that it may impose targeted additional reserve requirements on individual banks if rapid credit expansion creates inflationary pressure. Such requirements would be determined through regular assessments of each bank’s loan-to-deposit ratio.
In measures affecting the foreign exchange market, the central bank reduced its foreign exchange commission rate from 2.5 percent to 1.5 percent. The decision is intended to lower import-related costs, reduce the transmission of foreign exchange expenses into domestic prices and improve the efficiency of the foreign exchange market.
The NBE further reduced the foreign exchange surrender requirement applicable to goods exporters from 50 percent to 30 percent. The measure is expected to allow exporters to retain a larger share of their foreign currency earnings, strengthen export competitiveness and support confidence in the foreign exchange market.
The policy decisions come as Ethiopia faces renewed inflationary pressures linked to international fuel supply disruptions and higher transportation costs. Headline inflation increased to 13.4 percent in May 2026, compared with 11.7 percent in April and 9.7 percent in December 2025. Food inflation reached 15 percent, while non-food inflation stood at 11.1 percent.
Although the NBE expects inflation to moderate by December 2026, it said inflation is likely to remain in double digits during the coming six months.
The central bank reported that Ethiopia’s economy grew by 9.2 percent during the 2024/25 fiscal year and is projected to expand by 10.2 percent in 2025/26. It attributed the growth outlook to macroeconomic reforms and stronger activity in manufacturing, services and agriculture.
Ethiopia’s external sector also improved during the review period. The current account deficit declined from USD 6.2 billion in 2023/24 to USD 1.8 billion in 2025/26, supported by higher export earnings and increased private and official transfers.
The NBE said its foreign exchange reserves had increased to approximately 20 times their pre-reform level, while the balance of payments recorded an overall surplus.
The banking sector’s loan-to-deposit ratio declined to 72.7 percent from 90.3 percent in 2022/23, which the central bank said reflected improved liquidity management. Meanwhile, interbank money-market transactions exceeded Birr 3 trillion as of May 2026.
The Monetary Policy Committee reaffirmed that the NBE would continue pursuing a tight monetary policy stance, with the medium-term objective of reducing inflation to a single-digit level.
The Committee is expected to hold its next meeting at the end of September 2026, or earlier if economic conditions require.
Source: NBE
