Governor Eyob Ends Deposit-Rate Floors Restoring Policy Credibility

Jan 10 , 2026.

The National Bank of Ethiopia’s (NBE) decision, two weeks ago, to scrap the seven percent statutory minimum on deposit rates was celebrated by free-market enthusiasts and lamented by dirigistes.

However, it is perhaps too exaggerated to see the policy decision as anything beyond routine housekeeping, a scaffold removed long after the building had changed design. Ever since the Central Bank hoisted its policy rate to 15pc the floor had been redundant, a relic from a time when the price of money was set by decree rather than discovery.

The old floor was marketed as a shield for savers. In a country where bank deposits remain the default financial asset, that story was easy to sell. However, a guaranteed seven percent never protected anyone when inflation was galloping at 20pc to 30pc and beyond. It merely slowed the loss of purchasing power while flattering politicians who boasted of defending household incomes. Meanwhile, banks enjoyed large spreads.

During the 2010s, for instance, deposits paid roughly five to seven percent, loans cost 12pc to 15pc, net-interest margins were at six to eight percent, and returns on assets often topped two to three percent. Non-performing loans (NPLs) stayed low enough to make the model look both stable and lucrative. Inflation, not the deposit floor, was the true anchor of returns.

Between 2018 and 2022, consumer prices frequently rose by more than 20pc a year, peaking in the mid-30s. Demonetisation drives and crackdowns on cash hoarding funnelled money into accounts, lifting nominal deposits yet pushing households to stash the marginal Birr in properties or dollars. The statutory floor thus offered an illusion of safety while draining credibility from monetary policy.

By declaring liquidity worth 15pc the Central Bank exposed the contradiction. It is telling banks that money is dear while letting them reward savers at half that price. Such dissonance distorts loan pricing, borrower plans and public trust in efforts to restore the Birr’s value. Mamo Mehiretu, the former Governor whose liberal credentials put him at odds with the centre-left within the government and the left outside, saw the contradiction. His successor, Eyob Tekalegn (PhD), has now buried it by striking out the floor.

Moving an economy from rationing to prices means letting monetary tools bite. When the deposit floor is frozen by directive, the interest-rate channel withers, forcing officials to lean on blunt instruments, including reserve ratios, credit ceilings, and moral suasion. These shift volumes but invite misallocation and opacity. Worse, a low statutory minimum breeds complacency. If every bank pays the same, competition migrates to branch counts, raffles and shiny billboards rather than higher yields or better service.

The branch arms race has been fierce. In the decade beginning in 2015, deposits ballooned from about 300 billion Br to more than 2.9 trillion Br, with household money accounts for roughly two-thirds of the total. The state-owned Commercial Bank of Ethiopia (CBE) alone surpassed the two trillion Birr mark last week. Such heft proves that banks can mobilise cash when pushed by power and brand, but not that they price it properly.

Sceptics fear that without a floor, deposit rates will plunge. That misreads the new environment. With a double-digit policy rate, liquidity now carries an explicit price. Banks that underpay savers will haemorrhage funding to rivals or turn to dearer wholesale markets. Either outcome disciplines mis-pricing better than a decree.

Keeping a meaningless floor poses graver risks. A low statutory number can become a psychological ceiling, anchoring expectations downward even as macro conditions change. It also gives politicians an easy slogan of protecting savers, while inflation does the opposite. Scrapping the floor forces a frank debate about what truly guards savings between disinflation, credible policy and vigorous competition for deposits.

Consider a shopkeeper in Merkato who parks her money in a savings account because cash in the till is unsafe. Under the old rules, she earned seven percent while prices jumped 25pc. The bank lent to a larger client at 22pc or placed funds in government paper, pocketing the spread. She was not protected. She subsidised a cosseted system. In a price-based regime, her bank ought to either pay more or risk her departure to a neighbour offering a better deal.

For a policy rate to matter, its signal should ripple through the economy. If the Central Bank lifts the rate, borrowing should cool and saving be rewarded; if it cuts, credit should flow more freely. A rigid floor muffles that transmission, pinning a key price to an arbitrary figure and leaving the policy rate blinking like a lighthouse in fog.

True, the domestic banking industry is dominated by a few incumbents. Competition is far from being ideal. Yet the cure for weak competition should not be permanent price controls. It is greater contestability, forcing banks to publish effective deposit rates, easing account mobility, allowing products such as tiered or inflation-indexed savings, and policing hidden fees. Regulators should also ensure banks do not recoup freer pricing through stealth charges.

When disinflation eventually arrives, if it does at all, a binding floor becomes a tax on intermediation. If regulated deposits cost more than the market-clearing rate, banks raise lending rates or ration credit, hurting small manufacturers and exporters. Floors also muffle monetary policy, steering banks toward costlier wholesale funding. Even a one-percentage-point wedge in deposit costs can shape maturities and client choice. Removing the floor does not cure these ailments, but it clears the way for more honest price discovery.

Statutory floors mis-set in either direction damage the plumbing. When they exceed market rate margins, compression and lending shrink. When they sit far below the policy rate, banks grow lazy about courting savers. Scrapping the relic, alongside a credible policy rate, should sharpen their focus on efficiency, credit discipline, and funding strategy rather than hiding behind directives.

Yet nothing guarantees success. The economy still faces foreign-exchange scarcity, fiscal strains and an ingrained habit of using banks as instruments of state policy. Liberalisation will fail if inflation stays high and savers see no real return. But half-measures are worse. A modern policy rate smothered by legacy controls is incoherent. Governor Eyob should build consistency, then credibility, then, with luck, stability.

Seen in that light, axing the floor is less a technical tweak than a test of intent. The Governor could not claim to run policy through prices while clinging to a symbolic number that denies those prices. Nor could he defend savers, with a threshold inflation that has reduced to a rounding error. The statutory minimum deposit rate rule had become an expensive, distortionary, and an obstacle to the institutional learning a modern economy needs.

If savings are to finance growth rather than merely swell nominal aggregates, deposit rates should rise when policy tightens and fall when it eases. Banks that trumpet their role in job creation should woo savers honestly, not with gimmicks, and lend to productive firms rather than merely to the safest balance sheets. Removing the floor is simply the opening act. Governor Eyob's hard work in building a competitive, transparent and flexible financial system has only begun.

The Governor’s credibility will be judged on whether the new policy functions. A policy rate is a blunt declaration that inflation remains enemy number one. But disinflation will require fiscal discipline and a clearer foreign-exchange regime. Without them, monetary tightening risks choking credit without quelling prices, which is what has been happening over the last five years. A coherent macroeconomic strategy would pair rate liberalisation with credible plans to narrow the budget deficit, improve forex allocation and deepen capital markets, giving savers more instruments than bank accounts.

Still, the first step is the hardest. By burying the floor, Eyob has signalled that his Administration prefers honest prices to comforting fictions. Savers, borrowers and bankers will need time to relearn their cues. But at least the stage is no longer cluttered with scenery from an old play. The real performance, of transparent rates, sharper competition and a banking system that serves growth rather than optics, is about to begin.

PUBLISHED ON Jan 10,2026 [ VOL 26 , NO 1341]