Central Bank Courts Reform While Clinging to Control

Jan 3 , 2026
By Abreham Tesfaye

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The National Bank of Ethiopia’s (NBE) recent monetary policy overhaul demonstrates an uneasy compromise between reformist rhetoric and administrative conservatism. The result is a fragmented policy position that risks stalling rather than advancing the Central Bank’s stated reform goals, writes Abreham Tesfaye (abreham07@gmail.com), a consultant and trainer specialising in change management, sustainability, strategy management and transformational leadership.

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The Central Bank's latest monetary policy decision is drawing attention for its attempt to balance reform ambitions with the ongoing struggle against inflation. By liberalising deposit interest rates, tightening reserve requirements, and holding fast to a 24pc annual credit cap, the National Bank of Ethiopia (NBE) has introduced a package that looks toward market reforms but still clings to administrative controls.

The policy tinkering may seem prudent, but it also reveals a degree of hesitation, raising questions about the consistency and credibility of NBE's monetary policy reform path.

The removal of the minimum deposit rate stands out as the most reformist aspect of the new policy. For years, regulated interest rates distorted incentives in the financial system, delivering negative real returns to savers and prompting banks to compete on branch expansion and service fees rather than on deposit rates. The change now allows deposit rates to be set through negotiations between banks and customers, a step long-awaited by those calling for financial reform.

This aligns with the NBE's stated goal of shifting toward a price-based monetary system and, at least in theory, should encourage greater savings, improve resource allocation, and deepen financial intermediation.

However, in practice, this liberalisation’s impact will likely be limited by the wider policy framework in which it operates. The presence of a cap on annual credit growth means that deposit rates, even if market-determined, cannot serve as meaningful price signals as long as lending itself remains tightly rationed. By retaining this credit ceiling, the Central Bank reveals its continuing concern that easing credit too quickly might trigger renewed inflation, especially in an economy facing supply constraints and fragile public expectations.

The policy sends a clear message in this. While interest rates can move, the real control over credit remains firmly in administrative hands.

Credit caps may have played a stabilising role when inflation was rising and liquidity was plentiful, but their prolonged use brings increasing costs. These controls distort competition, favouring large and established borrowers who already have strong relationships with banks, while smaller and mid-sized firms are squeezed out. Investment decisions depend on access to credit rather than the viability of business ideas. Banks, meanwhile, are pushed to lend only to the safest balance sheets rather than to the most promising projects.

Over time, these distortions risk undermining economic growth and structural transformation, the very objectives that monetary policy stability is meant to support.

The policy package’s restrictive nature is further heightened by the Central Bank’s move to raise the monthly average reserve requirement. It is designed to drain excess liquidity from the banking system and support a disinflationary position. While this can effectively limit the growth of the money supply, it also increases the cost of financial intermediation and limits banks’ ability to lend. In a market already characterised by limited financial instruments, higher reserves make lending more expensive, encouraging banks to be more conservative and less innovative.

When combined with the credit growth cap, this results in an even narrower pathway for turning savings into productive investment.

This mixture of policies reflects the Central Bank’s effort to juggle several conflicting objectives all at once. Controlling inflation remains the top priority, driven by the high social and political costs associated with rising prices and the precariousness of household purchasing power. Yet the Central Bank is also under pressure to demonstrate reform, especially as Ethiopia seeks external financing and greater integration with global markets, and is yielding results.

The outcome is a hybrid approach that appears liberal in form but remains restricted in substance.

This delicate balancing act is not without risk. Allowing deposit rates to float while keeping lending rates and volumes under tight control could widen the spread between deposit and lending rates without making the financial system more efficient. Banks, faced with higher reserve requirements and binding credit limits, may compete more aggressively for deposits but ration loans more strictly, reinforcing financial exclusion rather than easing it.

While savers may see some benefit, borrowers, especially in the private sector, are unlikely to notice any meaningful improvement.

The credibility of monetary policymakers' move toward market-based monetary policy remains the fundamental issue at stake. For reforms to succeed, there needs to be a functional mechanism for transmitting policy changes, clear and reliable signals, and a willingness to let market prices guide resource allocation. The continued reliance on administrative controls, however, sends mixed signals to markets and suggests that reforms could be rolled back at any time. Restoring market confidence, once shaken, is no easy task.

However, the Central Bank’s latest decision is not without justification. It reflects caution amid a volatile economic landscape and recognises the limits of rapid liberalisation in a structurally constrained environment. But caution, if prolonged, can harden into inaction. Ethiopia’s challenge is to build the institutional confidence necessary for reforms to take root. Until that happens, monetary policy will remain stuck between latitude and control, and the economy will continue to bear the costs of indecision.

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PUBLISHED ON Jan 03,2026 [ VOL 26 , NO 1340]

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