NBE Cuts Liquidity Absorption to 40 Billion Birr as 100.7 Billion Matures

The National Bank of Ethiopia (NBE) has sharply reduced the size of its latest liquidity-absorbing operation, offering to take 40 billion birr from commercial banks as a previous 100.7-billion-birr operation matures.

The latest operation, OMO Auction No. 56, was held on September 3 as a two-week deposit-taking facility maturing on September 17. If the full 40 billion birr is absorbed, 60.7 billion birr less will be locked at the NBE compared with the previous operation.

The move follows the NBE’s unusually large August 20 operation, when it accepted the full 100.7 billion birr offered after banks submitted 160 billion birr in bids. Only two institutions participated, with accepted rates ranging from 4 percent to an 8 percent marginal rate.

By comparison, on August 6 the NBE absorbed 12.2 billion birr from six institutions at a 4.8 percent marginal rate.

A smaller liquidity drain

Open-market operations allow the NBE to temporarily absorb excess liquidity from banks. When an operation matures, the funds become available to participating banks unless they are rolled over.

The September operation therefore represents a substantially smaller liquidity drain than the 100.7 billion birr that is maturing. However, the effect should not be interpreted as a direct 60.7-billion-birr injection into the entire banking system. Liquidity remains affected by government transactions, foreign-exchange operations, reserve requirements and other NBE interventions.

The smaller operation also does not necessarily signal monetary easing. In July, the NBE raised its policy rate from 15 percent to 16 percent while removing its direct ceiling on annual bank-credit growth, saying it would increasingly rely on interest rates and other market-based tools to manage monetary conditions.

Where could the liquidity go?

Banks retaining more liquidity could increase lending, purchases of Treasury bills or interbank activity. Some funds could also move toward foreign exchange, potentially adding pressure to FX demand.

The impact will depend heavily on which banks receive the maturing funds and how they deploy them. The NBE has previously noted that excess liquidity is concentrated among a small number of banks.

With July inflation at 15.3 percent, the central bank faces a delicate balance: keeping monetary conditions tight enough to contain inflation while ensuring that liquidity remains available for credit and financial-market activity.

The key question is therefore not simply how much liquidity the NBE absorbs, but where the unabsorbed liquidity ultimately goes.

Source: Birrmetrics