The National Bank of Ethiopia (NBE) has maintained its tight monetary policy by holding the benchmark interest rate at 15% and extending the 18% cap on bank credit growth. Despite early signs of easing inflation, the central bank remains cautious, signaling that the relief is neither sustained nor sufficient for consumers and businesses.

At its third Monetary Policy Committee meeting of the year, held today, the NBE noted that annual inflation stabilized at 14.4% in April and May. Food inflation significantly dropped from 25.6% to 12.1%, but non-food inflation remained elevated at 17.8%, influenced by exchange rate changes and structural costs. The Committee stressed that the high cost of living, fueled by years of inflation, remains a major macroeconomic challenge.

Economic activity shows growth across agriculture, manufacturing, gold and coffee exports, and services such as air transport and tourism, according to the bank’s Composite Index of Economic Activity. However, the NBE emphasized that growth must not compromise macroeconomic stability.

Monetary aggregates like broad money and loan growth have expanded but still lag behind nominal GDP growth. Reserve money grew faster due to increased foreign currency reserves from gold purchases, yet inflationary risks remain controlled by preventing excess liquidity from fueling unchecked credit growth.

The central bank repealed a 2022 directive requiring commercial banks to buy Treasury bonds, reflecting improved government revenues and access to concessional borrowing, and signaling a shift toward market-based policies. Interest rates remain firm, with Treasury bill yields and inter-bank rates above the policy rate.

Fiscal discipline improved as government borrowing from the central bank ceased in FY 2024/25. Foreign exchange reserves have tripled, driven by export growth, stable remittances, and lower import bills, supported by last year’s exchange rate reform.