Interbank Rates Jump as Ethiopia’s FX Auctions Pull Birr From Banks

Ethiopia’s interbank money market has come under renewed liquidity pressure after a series of foreign-exchange auctions by the National Bank of Ethiopia (NBE) coincided with a sharp increase in short-term borrowing costs.

Banks traded 57.7 billion birr through the interbank money market between August 17 and August 21, more than double the 28.05 billion birr recorded the previous week, according to data from the Ethiopian Securities Exchange (ESX).

The surge in trading came alongside a significant increase in the cost of borrowing.

The weighted-average overnight rate climbed to 16.119 percent, from 13 percent the previous week, moving slightly above the NBE’s 16 percent policy rate. The seven-day rate also increased to 15.186 percent, from 13 percent.

The shift came after the central bank conducted a series of foreign-exchange sales that required commercial banks to provide birr in exchange for dollars, effectively reducing local-currency liquidity available to participating banks.

From the 13pc floor to above the policy rate

The August movement is notable because interbank rates had been remarkably stable earlier in the month.

Both overnight and seven-day borrowing averaged exactly 13 percent during the weeks of August 3–7 and August 10–14.

The 13 percent rate represented the lower end of the NBE’s interest-rate corridor. The central bank’s policy rate currently stands at 16 percent, with the corridor extending three percentage points on either side.

That changed during the week of August 17–21.

Banks completed 59 overnight and seven-day transactions, compared with 35 transactions the previous week. Seven-day borrowing accounted for most of the activity, with 46.575 billion birr traded across 47 transactions. Overnight transactions generated another 11.125 billion birr across 12 trades.

The combination of rising turnover and higher rates suggests that demand for short-term liquidity increased materially during the week.

FX auctions add pressure to birr liquidity

The rate increase coincided with a series of NBE foreign-exchange auctions in August.

The central bank sold $125 million on August 12, followed by a $500 million special FX auction on August 20, and another $125 million auction on August 26.

The August 20 operation was particularly large. The NBE allocated the full $500 million at a weighted-average exchange rate of 160.2144 birr per dollar, meaning banks collectively supplied roughly 80 billion birr in exchange for the foreign currency.

Taken together, the three August auctions represented approximately $750 million in foreign-exchange sales.

At the respective auction rates, the transactions amounted to roughly 120 billion birr exchanged for foreign currency, according to an analysis by StockMarket.et.

The timing is significant. The largest FX operation came during the same week that interbank rates moved sharply away from the 13 percent corridor floor.

However, the aggregate data do not establish that the FX auctions alone caused the increase. Government payments, reserve positions, lending activity and differences in individual banks’ liquidity positions can also influence the interbank market.

Overnight money becomes more expensive

One of the clearest signals from the August data is the relationship between overnight and seven-day borrowing.

During August 17–21, banks paid 16.119 percent for overnight funds, compared with 15.186 percent for seven-day money.

That is an unusual structure because longer-term funding would generally be expected to carry a higher rate.

The inversion suggests that immediate liquidity needs became particularly expensive.

The pattern continued, although at lower rates, during the following week.

Between August 24 and August 28, overnight borrowing fell to 14.574 percent, while the seven-day rate dropped sharply to 13.241 percent.

Seven-day borrowing therefore returned almost to the 13 percent corridor floor, while overnight funding remained more expensive.

Overnight turnover also increased substantially, reaching 19.7 billion birr during the week.

The divergence suggests that liquidity remained available within the banking system, but may not have been evenly distributed among banks.

Ethiopia’s liquidity problem may be about distribution

The latest movements are consistent with an issue the NBE has previously identified.

In its seventh Monetary Policy Committee assessment, the central bank said excess liquidity remained in the banking system, but was concentrated among a limited number of banks.

The NBE also reported that the seven-day interbank rate had declined to 14.6 percent in May 2026, from around 18 percent in March, as liquidity conditions eased.

The central bank has previously observed the opposite situation as well.

In its sixth MPC assessment, the NBE said the seven-day interbank rate had risen to 17.9 percent in February 2026, reflecting liquidity pressure at some private banks. The central bank linked the pressure partly to institutions with high loan-to-deposit ratios.

This means that a rise in interbank rates does not necessarily indicate that the entire banking system is running out of liquidity.

Instead, banks with surplus funds may coexist with institutions that need to borrow at higher rates.

The interbank market is designed precisely to redistribute those funds.

A test for the NBE’s new monetary framework

The developments also highlight the growing importance of Ethiopia’s interest-rate-based monetary-policy framework.

Introduced in July 2024, the framework makes the NBE’s policy rate the principal monetary-policy signal and uses the interbank rate as the operating target.

The central bank can influence liquidity through open-market operations and its standing facilities, while the interbank market allows banks to redistribute funds among themselves.

The August developments demonstrate how these mechanisms interact with foreign-exchange policy.

When the NBE sells foreign currency to commercial banks, banks pay for those dollars in birr. This can reduce the amount of local currency available for other transactions, including interbank lending.

If liquidity is already unevenly distributed, the impact can be greater for banks that depend more heavily on short-term borrowing.

The NBE also conducted a liquidity-absorbing open-market operation on August 20, according to its official records, the same day as the $500 million special FX auction.

The simultaneous use of these instruments makes August an important test of the central bank’s ability to manage liquidity while keeping short-term interest rates aligned with its monetary-policy objectives.

August tells a changing story

The four weeks of August show how quickly liquidity conditions can change.

Week	Interbank turnover	Overnight rate	Seven-day rate
Aug. 3–7	47.30B Br	13.000%	13.000%
Aug. 10–14	28.05B Br	13.000%	13.000%
Aug. 17–21	57.70B Br	16.119%	15.186%
Aug. 24–28	58.25B Br	14.574%	13.241%

Source: Ethiopian Securities Exchange data; FX-auction figures from NBE and market analysis.

The pattern does not yet point to a sustained, system-wide liquidity shortage.

Instead, it shows a market moving from a period of abundant liquidity, where rates were anchored at the 13 percent corridor floor, to a period of tighter and more uneven funding conditions.

The partial decline in rates during the final week of August provides some relief. But overnight borrowing remains above the corridor floor, suggesting that immediate liquidity demand has not completely normalized.

What banks will be watching

The direction of interbank rates in September will provide a clearer signal.

If both overnight and seven-day rates return to around 13 percent, the August spike could prove to have been a temporary liquidity adjustment following the NBE’s large FX operations.

If overnight rates remain elevated while seven-day rates stay close to the corridor floor, the market could instead be signaling that liquidity is available but concentrated among particular institutions.

A renewed increase in both maturities would provide stronger evidence of broader liquidity tightening.

For banks, the distinction matters. Short-lived liquidity pressure can be managed through interbank borrowing and the NBE’s standing facilities. Persistent increases in funding costs, however, could affect liquidity management, loan pricing and ultimately the cost of credit.

For the central bank, August offers an early test of its evolving monetary-policy framework: how to withdraw excess birr liquidity while ensuring that short-term funding pressure does not become concentrated among vulnerable institutions.

For now, Ethiopia’s interbank market is sending a more nuanced signal than a simple liquidity shortage. The price of immediate birr has risen sharply, even as significant liquidity remains somewhere within the banking system.

Source: stockmarket.et