The Fruits of Governance, Policy Reforms at NBE

On July 9, 2024, the National Bank of Ethiopia (NBE) unveiled a transformative monetary policy framework, marking a pivotal shift in the nation’s economic management and strategic financial planning. This framework aims to modernize Ethiopia’s monetary policy, enhance price stability, and align with international central banking best practices.

The cornerstone of this new framework is the transition to an interest-rate-based regime. The NBE will use the National Bank Rate (NBR), initially set at 15%, as the primary tool to signal its policy stance and influence broader monetary and credit conditions. This shift enhances transparency and predictability in monetary policy, aligning Ethiopia more closely with modern central banking practices.

The NBR will be adjusted based on prevailing inflationary and monetary conditions to manage economic stability. The initial rate of 15% reflects current macroeconomic factors, including gradually declining inflation, low base money growth, and slowed bank credit growth. This rate is close to interbank lending rates and slightly below commercial lending rates, ensuring it reflects market realities.

The introduction of Open Market Operations (OMO) is a significant feature of the new framework. These bi-weekly auctions will allow the NBE to manage liquidity in the banking system actively. By injecting or withdrawing liquidity, the NBE aims to keep interbank market rates aligned with the NBR, ensuring the broader financial system remains stable and responsive to economic conditions.

Additionally, the NBE is launching an Overnight Lending Facility and an Overnight Deposit Facility to help banks manage short-term liquidity needs. These facilities will be offered at the NBR rate plus or minus 3%, providing a flexible tool for banks to balance their daily liquidity requirements.

To further enhance the efficiency of the banking sector, the NBE is introducing an electronic platform for interbank lending and borrowing. This platform will facilitate a more active and functional interbank money market, allowing banks to address liquidity shortages or surpluses more effectively.

In contrast to previous frameworks, which relied heavily on quantitative measures and direct interventions, the new policy emphasizes market-based mechanisms and greater transparency. This shift reflects a broader trend towards modern central banking practices, where policy interest rates are central to monetary policy transmission.

As Ethiopia embarks on this new monetary policy journey, the NBE calls for the cooperation of all stakeholders to ensure its successful implementation. The reforms introduced today promise to build a stronger foundation for Ethiopia’s economic future, benefiting all sectors of society. The new monetary policy framework is expected to provide a robust foundation for sustainable economic growth, ensuring that inflation remains low and stable while fostering a more competitive and efficient financial system. This promising future should instil optimism and hope in all stakeholders.

This landmark shift in policy underscores the NBE’s unwavering commitment to modernizing Ethiopia’s monetary policy framework, aligning it with international standards, and ensuring that it is well-equipped to meet the challenges of a dynamic and evolving economic landscape. The NBE’s new framework is a testament to its dedication to fostering economic stability and growth in Ethiopia. This emphasis on modernization should reassure stakeholders and instil confidence in the changes being made.

The National Bank of Ethiopia’s leadership, particularly under Governor Mamo Mihretu, has demonstrated a strong commitment to monetary policy reform and governance. Since his appointment, the bank has implemented a series of stabilizing measures that have contributed significantly to curbing inflation and modernizing the financial sector. These efforts, coupled with the NBE’s enhanced independence and capacity, position the bank as a key driver of economic stability. This deserves recognition. We appreciate the hard work and dedication of Governor Mamo Mihretu and his team. EBR

12th Year • July 2024 • No. 131