Ethiopia’s Central Bank Holds Interest Rate at 15% as Inflation Cools and Economy Strengthens











Addis Ababa — Ethiopia’s central bank kept its benchmark interest rate unchanged at 15% and opted for only a cautious loosening of credit growth limits, signaling that policymakers remain focused on containing inflation even as the economy shows signs of broad-based strength.

The Monetary Policy Committee (MPC) of the National Bank of Ethiopia (NBE), which met for the fourth time on September 15, said that while price pressures have eased steadily over the past year, inflation remains well above the single-digit target. The decision underscores the balancing act facing policymakers: sustaining economic momentum and managing banking-sector liquidity while safeguarding price stability.

Inflation Slows, but Target Still Elusive

Headline inflation cooled to 13.6% in August 2017 from 18.8% a year earlier. Food-price growth dropped sharply to 12.7%, helped by improved agricultural productivity and government price-stabilization measures. Non-food inflation, however, crept up to 15.1%, reflecting the lingering effects of foreign-exchange market pressure and imported input costs.

Monthly inflation eased to 1.1% in August, signaling that the pace of price increases is moderating. The NBE credits its own tight monetary policy and improved agricultural output for the slowdown, but officials stressed that the rate of inflation is still above their preferred single-digit threshold.

Economy Shows Broad Strength

Despite the policy squeeze, Ethiopia’s economy continues to post robust growth. The National Bank’s Composite Index of Economic Activities points to solid expansion, driven by bumper harvests, rising industrial output and a rebound in export earnings.

Gold and coffee—two of Ethiopia’s most important export commodities—posted notable gains, while individual remittances and service exports helped narrow the current account deficit. Imports of semi-finished and consumer goods, by contrast, slowed, a shift that has also helped improve the balance of payments.

Money Supply Growth Outpaces Policy Tightening

Monetary aggregates are expanding far faster than the central bank’s policy stance might suggest. By the end of August 2017, broad money supply had grown 23.1% year-on-year, while base money surged 70.7%—a jump attributed mainly to an increase in the NBE’s foreign-exchange reserves from gold purchases. Domestic credit expanded 14% year-on-year, and total bank credit rose 5.4% compared to June levels.

The MPC noted that its credit growth restrictions prevented broad money from rising “elastically,” but acknowledged that higher foreign-exchange reserves have injected more liquidity into the banking system than initially expected.

Banking Sector Sound, but Liquidity Pressures Persist

Ethiopia’s banking industry remains broadly healthy, with low non-performing loans and solid capital buffers. Yet some lenders are experiencing liquidity tightness due to high loan-to-deposit ratios, the committee observed.

The NBE has leaned on its newly operational Interbank Money Market and daily lending facilities to ease these pressures. Since October 2017, interbank trading volumes have climbed sharply, reaching 945.1 billion birr by the end of August 2017, highlighting the growing role of market-based liquidity support.

Interest Rate Corridor Anchors Market

Short-term market rates have responded to the NBE’s open-market operations. The average yield on 91-day Treasury bills declined to 15% in August from 17.6% in June, while the seven-day interbank rate fell to 13.7%, comfortably within the NBE’s desired corridor. Policymakers said these moves signal a revival of the money market and demonstrate the effectiveness of their operations in guiding liquidity.

Fiscal Restraint Supports Monetary Policy

The central bank praised the government’s fiscal stance, noting that it refrained from borrowing from the NBE during the first two months of the current fiscal year. That discipline, the MPC said, reinforces the effectiveness of tight monetary policy and reduces the risk of inflationary financing.

External Sector Strengthens

Exports of gold and coffee, along with higher remittance inflows and improved net service trade, have helped narrow the current account deficit and push the overall balance of payments into surplus. The MPC credited the comprehensive economic reforms introduced in July 2016 for strengthening external performance and building resilience to global market volatility.

Global Backdrop: Growth with Lingering Risks

According to the International Monetary Fund, global growth is expected to rise to 3.0% in 2025 and 3.1% in 2026, while global inflation is projected to ease to 4.2% and 3.6% respectively. A weaker US dollar, improved financial conditions and fiscal expansion in major economies underpin the positive outlook.

However, the MPC cautioned that rising tariffs and supply chain disruptions could reignite price pressures in the US and other major economies, posing risks to Ethiopia’s external accounts and imported inflation.

Policy Call: Hold Rates, Loosen Credit Caps—But Cautiously

The MPC recommended keeping the National Bank Rate steady at 15% and leaving the standing deposit and lending facility rates as well as the reserve requirement ratio unchanged.

While the committee acknowledged the need to support growth by allowing more credit, it opted for a measured step—raising the cap on annual bank credit growth from 18% to 24% rather than scrapping it entirely, as had been planned for September. The move is intended to “maintain the current trend of deflation and preserve the soundness of the financial sector,” the MPC said.

The NBE will also continue to deploy its full suite of non-market-oriented policy tools—interest rate management, open-market operations including foreign-exchange interventions, and reserve requirements—to steer inflation toward its target.



The MPC signaled that the next policy review will take place in December 2018, when it will reassess inflation dynamics, liquidity conditions and global risks.

For now, Ethiopia’s monetary authorities appear intent on treading a narrow path: allowing just enough credit expansion to support an economy that is still growing strongly, while keeping their eye firmly on bringing inflation down into single digits and maintaining financial stability.