Why National Bank of Ethiopia Raised Interest Rate this Week
The National Bank of Ethiopia raised interest rate this week. The bank increased its main interest rate from 15% to 16%. This is the first change in interest rates within the last two years.
Ethiopian economy is under stress. Rising fuel prices have made it difficult for the inflation to be brought under control. Iran US Israel war has severely disrupted transport, logistics and food supply chains. Ethiopia’s CPI inflation jumped to 11.7% y/y in April from 9.4% in March, ending a 4‑month run of single‑digit inflation. In May, the inflation rate rose to 13.4%. Higher inflation results in reduction of customer’s purchasing power and increases the cost of living for households making it hard for many families to buy basic necessities. To control rising inflation, the bank increased interest rates this week.
In addition to the interest rate increase, the NBE has announced several policy measures to help economic growth continue. It reduced the foreign exchange surrender requirement for goods exporters from 50% to 30%. It also lowered its foreign exchange (FX) commission rate from 2.5% to 1.5%. The National Bank of Ethiopia also removed the 24% annual credit growth ceiling that had been imposed on commercial banks for the past two years. Without this limit, banks can provide more loans to businesses and individuals who qualify for it. The NBE introduced a targeted reserve requirement based on each bank’s loan-to-deposit ratio. This means banks that lend more compared to the deposits they receive may have to keep different reserve amounts.
