Ethiopia’s central bank has kept its benchmark interest rate at 16 percent despite a sharp acceleration in money supply growth, as it warned that inflation would remain in double digits for at least another six months.
The National Bank of Ethiopia (NBE) maintained its policy rate following its eighth Monetary Policy Committee meeting on Monday, while keeping the interest rate corridor at 300 basis points above and below the benchmark. Annual inflation stood at 14.9 percent in September, with non-food inflation reaching 15.1 percent, reflecting higher electricity tariffs, fuel costs and other household expenses.
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The bank expects price pressures to ease gradually but does not anticipate inflation returning to single digits within its six-month forecast period. It said the tight monetary policy stance remained necessary to bring inflation down towards its medium-term target.
The decision comes as the central bank grapples with accelerating liquidity growth. Annual broad money growth reached 40.2 percent in the first quarter of Ethiopia’s 2026/27 financial year, up from 33.2 percent in the corresponding period a year earlier. Reserve money growth also accelerated to 87.2 percent from 72.6 percent.
The NBE attributed much of the increase to its purchases of gold, which raised net foreign assets and injected local currency into the banking system. However, Governor Eyob Tekalign argued that the growth in monetary aggregates had not translated into a corresponding expansion of liquidity across the wider economy.
Asked by Ethiopian Business Review why the bank had not raised interest rates in response to the rapid money supply growth, Eyob said liquidity remained concentrated in some banks and that credit expansion had not produced the expected multiplier effect.
“Under the current circumstances, inflation is not linked to money expansion,” he said, adding that maintaining a tight policy stance was necessary as a risk management measure.
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The governor’s position differs from that of some independent economists, who have identified rapid money supply growth as a major driver of inflation in Ethiopia. The central bank’s own figures show that outstanding bank credit grew by 42.6 percent, while net deposits increased by 85.4 percent over the quarter, raising questions about the extent to which monetary expansion is feeding into economic activity and prices.
The bank said it would focus on absorbing excess liquidity rather than immediately increasing borrowing costs. Measures include recovering liquidity released through foreign currency transactions, strengthening open market operations and potentially adjusting reserve requirements for individual banks depending on their circumstances.
Inflation has begun easing from its earlier peak, but the bank said food and non-food costs continue to exert pressure on households. Bread and cereals, vegetables and pulses, and coffee beans were among the main contributors to food inflation, while higher electricity tariffs, kerosene and firewood prices drove non-food costs.
The central bank also acknowledged that the gap between Ethiopia’s official and parallel foreign exchange rates had not narrowed as much as expected following reforms introduced in July.
Those measures included reducing the foreign exchange commission rate from 2.5 percent to 1.5 percent and lowering the proportion of export earnings that exporters must surrender from 50 percent to 30 percent. Eyob said the changes had improved foreign currency supply in the formal market, although the gap between the two rates remained a concern.
The NBE plans further engagement with commercial banks to improve foreign currency availability and customer services, while strengthening oversight of their capital adequacy and compliance with foreign exchange regulations.
The committee also noted that the government had not obtained direct advances from the central bank for more than 27 months, the longest such period on record. However, excess reserves held by commercial banks have contributed to lower short-term interest rates, with Treasury bill and interbank rates remaining negative in real terms since May.
The decision leaves the central bank relying on liquidity management to contain inflation rather than raising its benchmark rate, even as money supply growth accelerates. Its next monetary policy meeting is scheduled for the end of January 2027, although the committee may meet earlier if economic conditions require it.
Whether the bank can absorb the additional liquidity generated by its gold purchases while easing supply-side price pressures will be central to its efforts to return inflation to single digits.
Faith Omoboye is a foreign affairs correspondent with background in History and International relations. Her work focuses on African politics, diplomacy, and global governance.
