By Yared Seyoum
- Commercial bank deposit and lending rates were previously heavily influenced by administrative guidance from NBE. Now rates will be more market-driven based on the repo rate level.
- Banks will still have scope to price loans based on their own funding costs and risk assessments of borrowers. And deposit-taking banks must continue paying depositors at least 7% on savings.
The National Bank of Ethiopia (NBE) announced a transition to an interest rate-based monetary policy framework on Wednesday as it seeks to cement recent gains in lowering inflation.
This comes after inflation eased more than expected in February, falling to 19.9 percent, according to data from the Ethiopian Statistics Service. The slowdown brings price growth closer to the central bank's targets.
In a video statement, NBE Governor Mamo Mihretu said the central bank is moving its policy transmission mechanism away from the use of reserve requirements and directives to banks, towards managing liquidity through setting a benchmark interest rate.
Mamo said "The new rate won’t affect how commercial banks set lending rates, which will continue to be determined based on market competition." He added that "The minimum deposit rate that banks pay customers, currently set at seven percent, also will not change under the new system."
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. The reforms mark a major step for Ethiopia's monetary authority to bring its policy settings more in line with international best practices, according to Mamo.
To facilitate implementation, the NBE said it will begin conducting bi-weekly open market operations. “The aim is to manage liquidity in the economy by absorbing any excess cash held by commercial banks,” Mamo explained.
The NBR will also introduce overnight lending and deposit facilities set at +/- 300 basis points from the policy rate to help smooth banks' daily liquidity management.
A key pillar will be launching an electronic interbank money market platform to promote active interbank lending.
Transitional liquidity tools will remain in place and quantitative measures may still be used, according to Mamo.
“Quantitative measures for monetary management may be used as supplementary tools, and specific instruments for interest-free banking providers will be specified soon,” he added.
