By Staff Writer
Nairobi – July 13, 2026 Ethiopia’s National Bank has unleashed its most aggressive interest rate tightening since the land mark July 2024 reforms, raising the policy rate by a full percentage point and abolishing the credit cap entirely, as the Middle East conflict reignites inflation and pushes headline prices to a nine-month high of 13.4 percent .
The decision, announced Monday following the National Bank of Ethiopia’s (NBE) 7th Monetary Policy Committee meeting, marked a definitive end to the temporary credit ceiling that had been in place since the reform era. The NBE Board confirmed that Ethiopia has now fully transitioned to an interest rate based monetary policy framework, allowing the central bank to rely exclusively on indirect instruments to maintain its tight stance going forward.
Inflation, which had fallen to single digits (9.7 percent) in December 2025, rebounded sharply starting in April 2026 following fuel supply disruptions from the escalating Middle East conflict. By May, headline inflation stood at 13.4 percent, driven by food inflation of 15.0 percent and non-food inflation of 11.1 percent .Month-on-month readings of 2.3 percent and 1.69 percent for April and May respectively are significantly above the five-year historical average, signalling intensifying price pressures. While the committee projects inflation to moderate toward the year-end, it is expected to remain in double digits over the next six months.
To counteract the effect of removing the credit cap, the MPC recommended—and the Board approved—a 1.0 percentage point increase in the NBE’s policy rate. They also kept the existing range of +/- 3 percentage points. The central bank will now set specific reserve requirements for banks depending on how much they lend compared to how much they take in deposits, to control credit if it starts to affect inflation.
To make imports cheaper and improve how efficiently the foreign currency is used, the NBE lowered the foreign exchange (FX) commission rate from 2.5 percent to 1.5 percent. In addition, to help exports and make the FX market more efficient, the requirement for exporters to surrender 50 percent of their exports in foreign currency has been lowered to 30 percent. This is expected to boost confidence and better set prices in the market.
Even with higher prices, Ethiopia’s real economy is doing better than expected. Real GDP grew by 9.2 percent in the fiscal year 2024/25.Industry added 3.7 percentage points, services added 3.1 points, and agriculture added 2.3 points. The NBE expects growth to go up to 10.2 percent in the next fiscal year, thanks to strong performance in cement production, electricity generation, iron and steel output, and a big recovery in tourism and air travel. However, some areas are not doing well, like coffee and oilseed exports, and imports of raw materials and petroleum.
On the money supply side, the NBE has made progress. The growth of money in the banking system slowed down to 43.0 percent compared to the previous year, down from 66.4 percent. Broad money growth also slowed to 32.7 percent compared to 35.2 percent. Importantly, unlike before the reforms, where credit was the main driver, money growth now includes more foreign assets, especially from gold deals.
The financial sector is doing well. Private Banks’ loans compared to their deposits improved to 72.7 percent from 90.3 percent in 2022/23.The government has also been careful with spending, not taking money directly from the NBE. This helped cut the budget deficit to 0.9 percent of GDP in the first ten months of 2025/26, compared to 2.1 percent in 2023/24.The T-bill market provided 206.5 billion Birr in financing during that year.
Internationally, Ethiopia’s financial balance has improved a lot. This is a big change from the deficits before the 2024 reforms. Export earnings tripled, and transfers from people and official sources improved. The current account deficit fell from USD 6.2 billion in 2023/24 to just USD 1.8 billion in 2025/26.As a result, the NBE’s foreign exchange reserves are now twenty times what they were before the reforms, giving a big buffer against outside problems.
The MPC also mentioned the IMF’s July 2026 World Economic Outlook. The Middle East conflict has changed the expected global situation. However, a new agreement between the United States and Iran might reduce some risks. The world is expected to grow at 3.0 percent in 2026, but inflation is expected to rise to 4.7 percent before going down to 3.9 percent in 2027.
The MPC ended their meeting by setting the next meeting for the end of September 2026 or earlier if needed. They emphasized that keeping a tight monetary policy is important to reach the NBE’s goal of bringing inflation down to single digits in the long run.
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