Major NBE Policy Decisions

The NBE announced five key policy actions aimed at controlling inflation, improving market efficiency, and strengthening Ethiopia’s financial system.

Inflation Rises Again After Significant Decline

The NBE reported that inflation declined significantly following Ethiopia’s July 2024 economic reforms, reaching single-digit levels by December 2025 after years of elevated price increases.

However, inflationary pressure returned in 2026 due to fuel supply disruptions linked to the Middle East conflict, which increased transportation costs and affected prices across the economy.

Headline inflation reached 13.4% in May 2026, increasing from 11.7% in April and 9.7% in December 2025.

The increase was driven by both food and non-food price pressures:

The NBE said inflation is expected to moderate toward the end of 2026 but will likely remain above single-digit levels over the near-term forecast period.

Ethiopia’s Economy Maintains Strong Growth Momentum

Despite inflation challenges, the NBE said Ethiopia’s economy continued to record strong growth, supported by improvements across major sectors.

Real GDP growth reached 9.2% in FY 2024/25, while growth is projected to reach 10.2% in FY 2025/26.

The main contributors to economic expansion were:

The NBE noted that high-frequency economic indicators continue to show strong economic activity, although some export categories, including coffee and oilseeds, experienced declines.

Ethiopia’s Foreign Exchange Position Improves as Exports Surge

The external sector showed significant improvement following the economic reforms introduced in July 2024.

According to the NBE, Ethiopia recorded an overall balance of payments surplus in FY 2025/26, reversing the deficits experienced before the reforms.

Key improvements include:

• Goods export earnings increased approximately threefold

• Current account deficit narrowed from $6.2 billion in FY 2023/24 to $1.8 billion in FY 2025/26

• Foreign exchange reserves increased to around 20 times pre-reform levels

The central bank attributed the improvement to stronger export performance, increased private and official transfers, and improved foreign exchange market conditions.

Banking Sector Remains Stable

The NBE said Ethiopia’s banking sector remained resilient during the review period, with improvements in:

• Deposit mobilization

• Loan collection

• Asset quality

• Capital buffers

Private banks also improved liquidity management, with the loan-to-deposit ratio declining to 72.7%, compared with 90.3% in 2022/23.

The removal of the credit cap gives banks greater flexibility to expand lending, but the NBE will continue monitoring credit growth through reserve requirements and other monetary policy instruments.

Treasury Bill Market Attracts Strong Investor Demand

The Treasury bill market continued expanding, with strong participation from investors.

The NBE reported total Treasury bill oversubscription of approximately Birr 667.8 billion, with particularly strong demand for short-term instruments.

The growth of the market has also been supported by increased participation from individual investors through newly established investment banks.

Fiscal Discipline Supports Economic Reform Agenda

The government maintained a disciplined fiscal approach during the review period, supporting the NBE’s efforts to control inflation.

Since the July 2024 reforms, the government has avoided direct borrowing from the central bank, helping reduce pressure on money supply growth.

The overall budget deficit-to-GDP ratio declined to:

• 0.9% during the first 10 months of FY 2025/26

• Compared with 2.1% in FY 2023/24

Treasury bills continued playing an important role in financing government needs, with net financing reaching Birr 206.5 billion during FY 2025/26.

NBE Maintains Tight Monetary Policy Despite Credit Cap Removal

The NBE emphasized that removing the credit cap does not mean a relaxation of monetary policy.

Instead, the central bank will rely on market-based tools, including:

• Policy rates

• Reserve requirements

• Other indirect monetary instruments

The 1 percentage point policy rate increase reflects the NBE’s continued focus on controlling inflation and maintaining price stability.

What the Policy Changes Mean for Investors and Businesses

The removal of the credit cap could provide banks with greater flexibility to increase lending, potentially supporting private-sector growth.

However, higher interest rates and tighter liquidity management measures mean banks will need to maintain disciplined lending practices.

For exporters, the reduction in the foreign exchange surrender requirement from 50% to 30% could improve incentives by allowing businesses to retain more foreign currency earnings.

For importers and businesses dependent on foreign currency, the reduction in FX commission costs may help reduce transaction expenses.

Outlook

The latest MPC decisions represent a major step in Ethiopia’s transition toward a market-based monetary policy system.

While inflation remains a key challenge, the NBE highlighted improvements in exports, foreign exchange reserves, fiscal discipline, and economic growth as positive developments.

The central bank expects continued use of monetary tightening measures to gradually bring inflation back toward single-digit levels over the medium term.

The next Monetary Policy Committee meeting is scheduled for the end of September 2026, or earlier if economic conditions require.