The National Bank of Ethiopia (NBE) is responsible for monetary policy. Its decisions affect inflation, interest rates, and the value of the birr.
The National Bank of Ethiopia
The NBE was established in 1963. Its main functions include:
- Issuing currency
- Setting monetary policy (interest rates, reserve requirements)
- Regulating commercial banks
- Managing foreign exchange reserves
- Acting as banker to the government
Monetary Policy Tools
- Policy rate: The NBE sets a benchmark interest rate that influences lending and deposit rates across banks.
- Reserve requirements: Banks must hold a percentage of deposits at the NBE. Higher reserves reduce lending capacity.
- Open market operations: Buying or selling government securities to inject or withdraw liquidity.
- Foreign exchange intervention: The NBE may buy or sell foreign currency to influence the exchange rate.
Impact on Exchange Rates
When the NBE raises interest rates, it can attract foreign capital and support the birr. When it loosens policy, the birr may weaken. The NBE also publishes a reference exchange rate; commercial banks trade within a band around it.
Inflation
A key goal of monetary policy is price stability. High inflation erodes purchasing power. The NBE uses interest rates and money supply controls to keep inflation in check.
Recent Reforms
Ethiopia has been gradually liberalizing its financial sector. Reforms may include more flexible exchange rates, interest rate liberalization, and opening the banking sector to foreign participation. Follow news and NBE announcements for updates.