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Ethiopia’s Central Bank Adopts Interest Rate-Based Monetary Policy, Sets Initial Rate at 15%.

Ethiopia has announced the implementation of an interest rate framework, setting its initial rate at 15%. In a major shake-up of the nation’s banking sector, authorities are also introducing and establishing an interbank market for currency trading.

In a statement, NBE Governor Mamo Mihretu announced that the central bank is shifting its policy transmission mechanism from relying on reserve requirements and directives to banks towards managing liquidity by setting a benchmark interest rate.

This strategic decision aims to stabilize the nation’s economic environment, addressing inflationary pressures and promoting sustainable growth. The National Bank of Ethiopia (NBE) unveiled this framework as part of its broader efforts to modernize the financial sector and enhance the effectiveness of monetary policy transmission.

Ethiopia’s economy has been undergoing rapid transformation, characterized by significant infrastructure investments and industrial growth. However, the country has also faced challenges, including high inflation rates and a burgeoning public debt. The introduction of the new interest rate framework comes at a crucial time, as the NBE seeks to navigate these challenges while fostering economic growth.

The repo rate, short for repurchase agreement rate, is a pivotal tool in central banking. It represents the rate at which the central bank lends short-term money to commercial banks. By setting this rate at 15%, the NBE intends to influence liquidity conditions in the banking system, thereby impacting interest rates across the economy.

“The new rate won’t affect how commercial banks set lending rates, which will continue to be determined based on market competition. The minimum deposit rate that banks pay customers, currently set at seven percent, also will not change under the new system.” NBE Governor said

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Under this new regime, commercial bank lending rates will remain determined by market competition, while the minimum deposit rate will stay at 7%. The NBE aims to manage economic liquidity by conducting bi-weekly open market operations and introducing overnight lending and deposit facilities. Additionally, an electronic interbank money market platform will be launched to promote active interbank lending.

Transitional liquidity tools and quantitative measures will still be employed as supplementary tools, with specific provisions for interest-free banking providers forthcoming.

The initial Policy Rate was set at 15 percent, reflecting the bank’s assessment of declining inflation and moderating money supply growth in the economy. According to Mamo Mihretu, the reforms represent a major step for Ethiopia’s monetary authority in aligning its policy settings with international best practices.

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