Ethiopia Loosens Its Grip on Lending, but Warily

Ethiopia’s central bank inched further along its cautious path of monetary loosening last week, when its Monetary Policy Committee (MPC) lifted the ceiling on annual credit growth by six percentage points to 24%. The move, announced four days after the MPC’s September meeting, marks the latest adjustment in a two-year experiment with direct credit controls. The policy rate remains at 15%, while reserve requirements for deposits are unchanged

Eyob Tekalign (PhD), now governor of the central bank had said the credit cap would be lifted in September releasing billions in fresh credit to the economy last month when he was serving in the position of State Minister of Finance. Yet the MPC stressed that inflation, at 13.6% in August, remains well above the single-digit target. To abolish the ceiling entirely, the committee argued, would be “imprudent.”

The decision reflects the delicate balance the National Bank of Ethiopia (NBE) is trying to strike. Double-digit inflation has been the bane of policymakers for much of the past decade. NBE introduced a 14 percent annual credit growth cap in August 2023 to curb inflation driven by rapid loan expansion. At the very end of last year, the ceiling was raised to 18 percent amid easing inflation, tighter monetary conditions, and stronger supply-side factors. Before the cap, credit growth averaged more than 25 percent annually across the banking sector, with some major banks exceeding 30 percent.

The central bank’s newly minted MPC, which held its inaugural meeting in late 2024, began by raising the cap modestly from 14% to 18% after keeping it unchanged for over a year. At the time, inflation had cooled to 16.9%, a five-year low, helped by tight monetary conditions. But banks complained of liquidity shortages, evidenced by soaring loan-to-deposit ratios and thin reserves.

That pattern persists today. Despite relatively stable non-performing loan ratios, liquidity pressures remain across the industry. The MPC hopes that a slightly higher credit allowance will relieve strains without reigniting inflation. The cautious tone underscores the committee’s broader mission: to shepherd Ethiopia from a regime of direct controls towards one of more conventional monetary management, while convincing a wary public that single-digit inflation is within reach.