Key takeaways:
- Ethiopia’s central bank raised its benchmark policy rate to 16%, the first increase since July 2024
- The National Bank of Ethiopia also removed the 24% annual credit growth ceiling
- Inflation has accelerated to 13.4% in May, up from 9.7% in December
Ethiopia’s central bank raised its benchmark interest rate for the first time in two years and scrapped the credit growth ceiling that had restricted bank lending since 2023, as policymakers move to fight a renewed rise in inflation.
The National Bank of Ethiopia (NBE) announced the decisions on Monday following the seventh meeting of its Monetary Policy Committee. The bank raised the National Bank Rate to 16% from 15%, and lifted the 24% annual credit growth cap that commercial banks had operated under for nearly three years.
The moves mark Ethiopia’s biggest step yet toward an interest-rate-driven monetary policy framework, shifting away from direct administrative controls on lending toward market-based tools.
The NBE said the credit cap had served its purpose as a temporary instrument introduced during a period of high inflation, and its removal does not signal a shift toward looser monetary policy.
The central bank said it will continue relying on policy rates, reserve requirements and liquidity management to keep financial conditions tight.
From inflation crisis to a market-based framework
The credit ceiling was introduced in August 2023, when Ethiopia was grappling with inflation near 30% and rapid bank lending was adding pressure to prices.
Banks were initially restricted to 14% annual credit growth, a limit that was eased to 18% in December 2024 and 24% in September 2025 as inflation moderated. Full removal of the cap had been repeatedly delayed as the NBE worked to strengthen its alternative policy tools.
To guard against a renewed surge in lending, the NBE introduced a targeted safeguard alongside the cap’s removal.
If credit expansion threatens inflation stability, the central bank can impose additional reserve requirements on individual banks based on their loan-to-deposit ratios, allowing it to target institutions that expand lending too aggressively rather than restricting the entire banking sector.
Exporters get to keep more of their dollar earnings
Monday’s rate increase was the first adjustment since the NBE introduced its interest-rate-based framework in July 2024, when the National Bank Rate was initially set at 15%.
The reforms have been part of a broader economic overhaul under Prime Minister Abiy Ahmed, which has included allowing the birr to trade more freely and opening the banking sector to foreign investment.
Alongside the rate hike, the NBE cut the foreign exchange transaction commission charged by banks to 1.5% from 2.5%, lowering the cost of FX transactions. It also reduced the foreign exchange surrender requirement for exporters to 30% from 50%, allowing exporters to retain a larger share of their foreign currency earnings.
The NBE said the change would improve competitiveness and support export growth, building on earlier reforms that exempted service exporters and companies in special economic zones from surrender requirements.
Oil price shocks are undoing months of falling inflation
The policy shift comes as inflation has reaccelerated after months of decline. Headline inflation fell into single digits in December 2025 for the first time in nearly a decade, reaching 9.7%, before climbing to 11.7% in April and 13.4% in May.
Food inflation reached 15%, while non-food inflation stood at 11.1% year-on-year. The NBE attributed much of the increase to external factors, particularly higher oil prices and transport costs linked to the US-Iran conflict, rather than excessive domestic demand.
Ethiopia remains Africa’s fastest-growing economy, expanding 9.2% in the 2024/25 fiscal year, exceeding its average growth rate over the prior eight years. Industry contributed the most to that growth, adding 3.7 percentage points, driven largely by gold production, followed by services and agriculture.
The country’s external position has also strengthened. Its current account deficit narrowed to $1.8 billion in the 2025/26 fiscal year from $6.2 billion the year before, supported by stronger exports, remittance inflows and improved capital flows.
The government has avoided direct borrowing from the central bank since the reforms began, financing deficits instead through the Treasury bill market, where the fiscal deficit stood at 0.9% of GDP over the first ten months of the fiscal year, down from 1.6% a year earlier.
