Ethiopia's National Bank faces challenges in anti-inflation strategy with flawed liquidity operations

In response, the National Bank of Ethiopia NBE implemented a credit cap and shifted to an interest rate-based monetary policy framework in August 2023, moving away from a monetary targeting framework. This new approach uses open market operations OMO to manage liquidity in the banking system. Inflation has since gradually decreased from 34.4% in May 2023 to 13.6% in June 2026.

The NBE recently lifted the credit cap, intending to focus on the interest rate framework to achieve price stability, with the NBE policy rate as the primary instrument. The NBE's use of interest rates relies on OMO to guide the 7-day interbank money rate, which is expected to influence lending rates. However, the performance of this new framework has been puzzling.

Initially, the NBE set the policy interest rate at 15%, allowing commercial banks to determine the quantity of liquidity, leading to unpredictable liquidity absorption. From early 2026, the NBE changed its approach, determining the quantity of liquidity to absorb while allowing commercial banks to set the interest rate. Due to substantial liquid resources in commercial banks, partly from the NBE's gold for reserve scheme, pre-set quantity liquidity absorbing OMOs have resulted in oversubscription and a declining OMO interest rate, widening its gap from the interbank money market rate.

Between April and June 2026, only 46.6% of