MONETARY POLICY

NBE’s 5-Point Reset: Rate Hike, Credit Cap Scrapped, FX Rules Eased

Five-point package pairs a rate hike with looser credit and FX rules, as fuel-driven price pressures push inflation back into double digits.

Addis Ababa, 13 July 2026

The National Bank of Ethiopia’s Monetary Policy Committee, meeting for the seventh time since its creation, approved a five-point package on July 13 that raises the benchmark policy rate by one percentage point, fully removes the 24-percent credit growth cap introduced during the 2024 reform, and eases two key foreign exchange rules affecting exporters and importers.

The move responds to a re-acceleration of inflation. After dropping into single digits by December 2025 for the first time since the July 2024 devaluation, headline inflation has rebounded into double digits since April, reaching 13.4 percent in May, a nine-month high. The central bank attributes the reversal largely to fuel supply disruptions tied to the Middle East conflict, which pushed up transportation costs and fed through to both food and non-food prices. Food inflation stood at 15.0 percent in May and non-food inflation at 11.1 percent, and month-on-month readings in April and May ran well above their five-year averages.

Credit cap retired, reserve rule takes its place

The credit cap, in place since the 2024 reform as a temporary bridge, is being retired now that the bank has fully shifted to an interest-rate-based framework built on indirect policy tools. NBE describes the removal as a technical transition rather than a loosening of its stance and is pairing it with a new targeted reserve requirement that will apply to individual banks based on their loan-to-deposit ratios if credit growth starts to threaten the inflation outlook.

A counter-tightening rate hike

The policy rate rises by one percentage point, with the existing plus-or-minus-three-point corridor left unchanged. The committee frames the increase as a counter-tightening measure, intended to offset the risk that scrapping the credit cap could otherwise loosen financial conditions just as inflation is running hot.

FX commission and surrender requirement both cut

Two further changes target the foreign exchange market. The NBE’s FX commission drops from 2.5 percent to 1.5 percent, a move aimed at lowering import costs and containing the pass-through of currency costs into domestic prices. Separately, exporters will now be required to surrender 30 percent of their FX earnings, down from 50 percent, a step intended to sharpen export competitiveness and deepen price discovery in the FX market.

Growth, external and fiscal backdrop

The measures come against a backdrop of continued strong growth. Real GDP expanded 9.2 percent in FY2024/25 and is projected at 10.2 percent for FY2025/26, with industry, services and agriculture all contributing. High-frequency indicators point to strength in cement, electricity, and steel output, as well as tourism and air transport, though coffee and oilseed export volumes and raw material and petroleum imports declined over the period.

The external sector has strengthened markedly since the 2024 reform. The current account deficit narrowed to $1.8 billion in FY2025/26 from $6.2 billion in FY2023/24, helped by a threefold rise in goods export earnings, and reserves have grown to twenty times pre-reform levels. Fiscal policy has stayed disciplined, with the budget deficit falling to 0.9 percent of GDP in the first ten months of FY2025/26 from 2.1 percent in the pre-reform year, aided by the government’s continued avoidance of direct NBE advances.

Reserve money growth slowed to 43.0 percent year-on-year in FY2025/26 from 66.4 percent a year earlier, though the deceleration owes more to a buildup of net foreign assets tied to gold operations than to tighter domestic credit. Short-term interest rates have eased in tandem: the 91-day Treasury bill yield fell to 11.0 percent in May from 16.1 percent a year earlier, while private banks’ loan-to-deposit ratio dropped to 72.7 percent from 90.3 percent in 2022/23, pointing to a more comfortable liquidity position across the sector.

Inflation is expected to stay in double digits

The committee’s own projection points to the limits of the package: headline inflation is expected to moderate by December but remain in double digits across the six-month forecast horizon. The bank also flagged a more uncertain global backdrop, citing the IMF’s July 2026 World Economic Outlook, which shows the Middle East conflict weighing on global growth forecasts for 2026 even as a US-Iran memorandum of understanding aimed at ending the conflict has eased some downside risk. Global inflation is projected to climb to 4.7 percent in 2026 before easing to 3.9 percent in 2027.

The MPC’s next meeting is scheduled for the end of September, though the bank left open the possibility of convening sooner if conditions warrant.