Ethiopia’s Central Bank Ends Credit Cap as Monetary Policy Framework Enters New Phase

Addis Ababa, July 13, 2026 (FMC) — Ethiopia’s National Bank has removed the credit cap imposed on banks, marking a new phase in the country’s monetary policy framework as it completes the transition to an interest rate-based system while maintaining a tight policy stance to contain inflation.

The decision was approved by the National Bank of Ethiopia (NBE) Board following recommendations from the Bank’s Monetary Policy Committee (MPC), which held its seventh regular meeting to assess developments in the domestic and global economy and determine appropriate policy actions.

The central bank said the credit cap, introduced as a temporary transition measure, has achieved its intended objective and will now be replaced by indirect monetary policy instruments under an interest rate-based framework.

It stressed that the move does not signal a relaxation of monetary policy, but rather reflects the country’s successful transition to a more market-oriented policy regime.

To reinforce its commitment to price stability, the NBE Board also approved a one-percentage-point increase in the policy interest rate while maintaining the existing plus-or-minus three percentage-point policy rate corridor.

In addition, the Board endorsed a targeted reserve requirement mechanism that will allow the central bank to impose additional reserve requirements on individual banks based on regular assessments of their loan-to-deposit ratios should credit expansion generate inflationary pressures.

The Board also approved reducing the foreign exchange commission rate from 2.5 percent to 1.5 percent to lower import-related costs, contain inflationary pass-through and promote a more efficient foreign exchange market.

To support export competitiveness and deepen the foreign exchange market, the mandatory foreign exchange surrender requirement on goods exports was also reduced from 50 percent to 30 percent.

The MPC noted that inflation had fallen significantly following Ethiopia’s macroeconomic reforms launched in July 2024, reaching single digits by December 2025 after years of elevated price growth.

However, it said inflation returned to double digits beginning in April this year, largely due to fuel supply disruptions stemming from the recent Middle East conflict.

Headline inflation rose to 13.4 percent in May 2026 from 11.7 percent in April and 9.7 percent in December 2025, driven by increases in both food and non-food prices.

While inflation is expected to moderate toward the end of the year, the Committee projected it would remain in double digits over the next six months.

The Committee also observed that Ethiopia’s economy continues to maintain strong growth momentum.

Real gross domestic product (GDP) expanded by 9.2 percent in the 2024/25 fiscal year and is projected to grow by 10.2 percent in 2025/26, supported by continued macroeconomic reforms and robust performance across industry, services and agriculture.

According to the Committee, high-frequency economic indicators point to strong activity in manufacturing, electricity generation, tourism, air transport and other key sectors, although coffee and oilseed export volumes, as well as imports of raw materials and petroleum, declined compared with the same period of the previous fiscal year.

On monetary developments, reserve money growth slowed to 43 percent in 2025/26 from 66.4 percent a year earlier, while broad money growth eased to 32.7 percent from 35.2 percent.

The Committee attributed the expansion in reserve money primarily to stronger net foreign asset accumulation, driven largely by gold operations.

The Committee also reported continued resilience in the banking sector, citing improved deposit mobilization, stronger loan recovery, healthy capital buffers and better asset quality.

The loan-to-deposit ratio of private banks declined to 72.7 percent from 90.3 percent in 2022/23, reflecting improved liquidity management.

On fiscal developments, the MPC said prudent fiscal management has continued to complement the central bank’s tight monetary policy.

The overall budget deficit narrowed to 0.9 percent of GDP during the first ten months of the 2025/26 fiscal year, down from 2.1 percent in the pre-reform period, while the government has continued to refrain from direct borrowing from the central bank.

The Committee further highlighted notable improvements in Ethiopia’s external sector following the July 2024 reforms. It said the balance of payments recorded an overall surplus in 2025/26, supported by a threefold increase in merchandise export earnings and stronger private and official transfers.

The current account deficit narrowed from 6.2 billion U.S. dollars in 2023/24 to 1.8 billion dollars, while the NBE’s foreign exchange reserves increased to around twenty times their pre-reform level.

Looking ahead, the MPC noted that the global economic outlook remains uncertain due to the inflationary effects of the recent Middle East conflict, although improving geopolitical conditions could help ease downside risks.

The Committee said its next regular meeting is scheduled to take place at the end of September 2026.