The National Bank of Ethiopia has ordered commercial banks to hold a larger share of their deposits as reserves, responding to what it described as excess liquidity and unusually fast credit growth in the financial system.
In its Monetary Policy Committee decision released on December 30, the central bank said banks will now be required to maintain a 10 percent reserve ratio on a monthly average, while the daily reserve requirement will remain at five percent. Banks have been given three to six months to comply.
The move comes after a sharp expansion in credit and money supply. By the end of November 2025, outstanding bank credit had grown by 44.5 percent year on year. Broad money rose by 38.8 percent, while base money increased by 67.3 percent, the fastest pace in recent years.
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The Committee said this growth was driven by a surge in new loan disbursements and by liquidity injected into the system through the central bank’s foreign exchange accumulation, particularly from gold exports.
Although the credit cap policy has influenced the money multiplier and helped limit the expansion of broad money, the Monetary Policy Committee said that annual growth in broad money by the end of November 2025 was the highest in recent years and much higher than nominal GDP growth.
The Committee described this as a concerning trajectory going forward, adding that a big surge in new loan disbursements and strong year-on-year growth in outstanding credit had led to the highest annual increase in money supply.
The decision was taken at a time when inflation is easing but has not yet reached the central bank’s single digit target. Headline inflation stood at 10.9 percent in November 2025. Food inflation declined to 10.6 percent from 18.5 percent a year earlier, while nonfood inflation slowed to 11.4 percent. Prices also fell by 1.4 percent on a month-on-month basis, indicating continued easing of price pressures.
The central bank said the disinflation trend has been supported by tight monetary policy, improved agricultural output and gradual adjustments in administered prices. It warned, however, that the recent acceleration in money and credit growth could undermine these gains if not addressed.
Alongside the reserve ratio increase, the central bank kept its policy rate unchanged. The National Bank Rate remains at 15 percent, and rates for the Standing Deposit Facility and the Standing Lending Facility were also left unchanged.
The MPC also decided to keep the credit cap in place. Banks will continue to be limited to 24 percent year on year credit growth until the next policy meeting.
The Committee said the policy rate has not yet developed a strong transmission mechanism, and that the improvement in system liquidity makes it necessary to manage credit expansion carefully to avoid unintended inflationary effects.
Another major change was made to the way deposit rates are set. The central bank removed the minimum deposit interest rate it had previously imposed on banks. From now on, deposit rates will be determined through negotiation between banks, depositors and other financial institutions.
The MPC said this step is meant to support the price based monetary policy framework introduced in July 2024 and to make the policy rate more effective in influencing market interest rates.
The policy decisions were announced against a backdrop of strong economic growth. Ethiopia’s economy expanded by 9.2 percent in the 2024/25 fiscal year, supported by services, industry and a sharp rise in gold production. Agriculture also recorded modest gains.
The central bank, however, reported declines in exports of oilseeds, pulses and flowers, as well as lower imports of raw materials and petroleum compared to the same period last year.
The external sector has remained resilient following reforms introduced in July 2024. The balance of payments recorded a surplus, driven by growth in gold and coffee exports, remittances, services trade and capital inflows.
These developments helped push the country’s international reserves to their highest level on record.
Fiscal policy has also been aligned with the central bank’s tight stance. During the first five months of the 2025/26 fiscal year, the government did not borrow from the National Bank of Ethiopia and instead financed its budget deficit through treasury bills, raising more than 70 billion birr.
The banking sector was described as generally sound, with low non-performing loans and adequate capital, although some banks continue to face liquidity pressures due to high loan to deposit ratios.
The interbank money market and the Standing Lending Facility have helped ease short term pressures.
The Monetary Policy Committee said it will continue to use all available tools if it believes price stability is at risk. Its next meeting is scheduled for the end of March 2026, or earlier if conditions require.
