MARCH 31, 2026  |  ETHIOPIA  |  MONETARY POLICY

Ethiopia’s Central Bank Holds Policy Rate, Flags Middle East Oil Risk as Inflation Hits Single Digits

The National Bank of Ethiopia (NBE) announced on Tuesday that its Monetary Policy Committee (MPC) has decided to keep the central bank’s policy rate and annual credit growth caps unchanged, in a move signalling continued confidence in the country’s inflation trajectory — while issuing a cautious note on global risks. The decision came out of the MPC’s sixth meeting, held on March 21, 2026, in Addis Ababa.

Ethiopia’s headline inflation eased to 9.7 percent in February 2026, maintaining the single-digit threshold the NBE first achieved in December 2025 — a milestone that marks a significant turnaround from the double-digit inflation that gripped the country for much of the past three years. The MPC attributed the sustained deceleration to tight monetary policy maintained since August 2023, improved fiscal discipline, and supply-side interventions by the government.

Inflation Cools Across the Board

Breaking down the latest inflation figures, food inflation dropped to 10.8 percent in February 2026, a considerable improvement from 14.6 percent recorded in the same month a year earlier. Non-food inflation fell even more sharply, declining to 8.1 percent from 15.6 percent over the same period. Month-on-month inflation came in at just 0.4 percent in February, reflecting a steadily easing price environment.

Despite the progress, the Committee flagged geopolitical tensions in the Middle East as a growing threat to the inflation outlook. Rising global oil prices, triggered by the conflict, risk pushing up domestic energy and transport costs, with potential second-round effects on food and non-food prices. The MPC underscored the importance of maintaining the tight monetary policy stance to guard against these upside risks, and agreed to reconvene in late April — or earlier if conditions warrant — to reassess the situation.

Economy Grows at 9.2 Percent

On the growth front, the MPC reported that Ethiopia’s economy expanded at a real GDP growth rate of 9.2 percent in the 2024/25 fiscal year — well above the 7.5 percent average recorded over the previous eight years. The industrial sector was a standout performer, with its contribution to growth rising from 2.7 percent in 2024 to 3.7 percent in 2025, driven largely by a surge in mining and quarrying activity.

Gold mining proved particularly dynamic: its contribution to GDP growth jumped tenfold, from just 0.1 percent in FY 2023/24 to 1.0 percent in FY 2024/25. The services sector maintained a steady 3.1 percent contribution to growth, supported by surging tourist arrivals and strong air transport activity, while agriculture’s contribution edged up from 2.2 percent to 2.3 percent. The NBE’s Composite Indicators of Economic Activity (CIEA) — which tracks high-frequency data across sectors — signals that this momentum is carrying into the current FY 2025/26.

However, not all indicators were positive. The Committee noted declines in coffee and oilseed export volumes, and a drop in raw material imports compared to the prior fiscal year — trends that could weigh on manufacturing output and export revenues if sustained.

Monetary and Banking Sector Developments

Money supply continued to expand rapidly. As of February 2026, broad money grew by 39.3 percent year-on-year, while base money expanded 43.2 percent over the same period. Bank credit growth was even more pronounced, reaching 45.3 percent year-on-year by end-February 2026 — a figure the MPC noted is being carefully monitored through annual credit growth caps.

The MPC observed that the rapid growth in broad money has been primarily credit-driven, while moderate base money growth reflects significant sterilization through foreign exchange auctions — a key tool the NBE has used to manage liquidity without stoking inflation.

In the Treasury Bills market, the 91-day T-bill weighted average yield declined to 12.4 percent in February 2026, down from 15.2 percent in February 2025, reflecting strong investor appetite from private and non-bank institutions. The 7-day interbank rate, however, rose to 17.9 percent from 16.5 percent a year earlier, pointing to continued liquidity pressure in some private banks. The inter-bank money market — launched in late October 2024 — has grown steadily, with cumulative traded volumes reaching Birr 1.97 trillion. The banking sector as a whole remains adequately capitalized with low non-performing loans (NPLs), though pockets of liquidity stress persist.

Fiscal Discipline Holds, But Deficit Widens

Fiscal policy during the review period was assessed as prudent and broadly aligned with the NBE’s tight monetary stance. The government has refrained from taking direct advances from the NBE since the July 2024 macroeconomic reform — a practice that had historically been a major driver of monetary expansion.

Despite a 65 percent year-on-year increase in revenue mobilization, the overall budget deficit-to-GDP ratio widened to 1.1 percent during the first seven months of FY 2025/26, up from 0.7 percent in the same period last year, as total expenditure grew by 48 percent. The gap has been financed largely through the T-bill market, which absorbed net Birr 136.6 billion over the same period.

External Sector Posts Surplus

Ethiopia’s balance of payments recorded a surplus during the first eight months of FY 2025/26, driven by improvements in coffee and gold exports, private transfers, net services trade, and capital account inflows. The MPC noted that these gains reflect the impact of the July 2024 macroeconomic reform — which included a significant exchange rate liberalization — in improving external competitiveness and boosting foreign exchange earnings.

Global Risks Cloud Outlook

Looking at the global environment, the MPC referenced the IMF’s January 2026 World Economic Outlook, which projected global growth at 3.3 percent in 2026 and 3.2 percent in 2027. However, the Committee warned that this baseline is now threatened by the oil price shock stemming from escalating Middle East tensions. Higher energy prices are expected to raise production costs, erode real incomes, and tighten financial conditions globally — with the heaviest impact likely to fall on oil-importing economies such as Ethiopia.

Key Figures at a Glance

Selected macroeconomic indicators from the MPC’s 6th meeting review:

Indicator	Feb 2026	Feb 2025 / Prior
Overall Inflation (y-o-y)	9.7%	~18.3% (est.)
Food Inflation	10.8%	14.6%
Non-Food Inflation	8.1%	15.6%
Month-on-Month Inflation	0.4%	—
Real GDP Growth (FY 2024/25)	9.2%	7.5% avg (8 yrs)
Broad Money Growth (y-o-y)	39.3%	—
Bank Credit Growth (y-o-y)	45.3%	—
91-Day T-bill Yield	12.4%	15.2%
7-Day Interbank Rate	17.9%	16.5%
Budget Deficit-to-GDP	1.1%	0.7%

Source: National Bank of Ethiopia MPC Press Release, March 31, 2026

The MPC’s decision to hold rates steady reflects a central bank that believes its current policy mix is working — but is acutely aware of the fragility of that progress. With inflation just inside the single-digit target and global headwinds intensifying, policymakers have left themselves little margin for error. The agreed early April review date signals that Ethiopia’s monetary authorities are ready to act swiftly should conditions deteriorate.

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Source: National Bank of Ethiopia Monetary Policy Committee Press Release No.6, 31 March 2026 (nbe.gov.et)