• Inflation slowed to 9.7% in February 2026, maintaining single-digit levels since December 2025
• The central bank maintained its tight monetary policy stance despite strong 9.2% GDP growth
• Rising global oil prices linked to Middle East tensions pose new inflation risks

The National Bank of Ethiopia has maintained a tight monetary policy stance after inflation eased to 9.7% in February 2026, marking a continued decline and keeping inflation within single-digit levels since December 2025, according to the central bank’s Monetary Policy Committee following its sixth meeting held in Addis Ababa in March 2026. The Committee said the disinflation trend reflects sustained monetary tightening since August 2023, supported by improved fiscal discipline and supply-side measures. Food inflation dropped to 10.8% from 14.6% a year earlier, while non-food inflation slowed more sharply to 8.1% from 15.6%, indicating broad-based easing of price pressures across the economy.

Despite this progress, policymakers warned that rising geopolitical tensions in the Middle East could reverse gains by pushing up global oil prices and disrupting supply chains, creating upward risks for inflation in the coming months.

On the growth front, Ethiopia’s economy remains resilient. Real GDP expanded by 9.2% in FY 2024/25, significantly above the 7.5% average growth recorded over the past eight years. The expansion was driven by stronger industrial activity, with the sector’s contribution rising to 3.7%, supported notably by mining. Gold production played a key role, with its contribution to growth increasing tenfold to 1.0%, up from 0.1% the previous year.

Solid growth momentum amid tight financial conditions

High-frequency indicators suggest that growth momentum is continuing into FY 2025/26, supported by manufacturing activity, increased electricity generation, and improved performance in services, including tourism and air transport.

Monetary conditions, however, remain tight. Broad money grew by 39.3% year-on-year as of February 2026, largely driven by credit expansion, while bank lending rose by 45.3% year-on-year, reflecting strong demand for financing despite policy tightening. Base money growth remained more contained due to liquidity sterilization through foreign exchange auctions.

Interest rate developments show mixed signals. The yield on 91-day Treasury bills declined to 12.4% from 15.2% a year earlier, reflecting increased investor participation, while the interbank rate rose to 17.9%, pointing to persistent liquidity pressures in parts of the banking sector. Since its launch in late 2024, the interbank money market has recorded cumulative transactions of 1.97 trillion birr, improving short-term liquidity management.

The banking sector remains stable overall, with low non-performing loans and adequate capital levels, although some banks continue to face liquidity constraints due to high loan-to-deposit ratios. Central bank facilities, including a standing lending facility, have helped ease short-term pressures.

Fiscal policy has remained aligned with monetary tightening. The government has refrained from central bank financing since reforms introduced in July 2024. The budget deficit stood at 1.1% of GDP in the first seven months of FY 2025/26, up from 0.7% a year earlier, with financing largely sourced from the domestic Treasury bill market, which raised 136.6 billion birr over the period.

Externally, Ethiopia’s position has improved. The balance of payments recorded a surplus following reforms implemented in 2024, supported by stronger exports, particularly coffee and gold, as well as increased private transfers and service sector earnings.

Looking ahead, the Monetary Policy Committee reaffirmed its decision to maintain the policy rate and credit growth caps at current levels, emphasizing that a tight stance remains necessary to sustain price stability. The Committee also signaled increased vigilance, noting it could reconvene earlier than scheduled if global shocks, particularly oil price volatility, begin to affect the domestic economy.

Ethiopia’s policy stance reflects a balancing act between sustaining rapid economic growth and anchoring inflation expectations after years of high price pressures. While inflation has now fallen below 10%, strong credit expansion and external risks, particularly rising oil prices for an import-dependent economy, mean the central bank is likely to maintain tight conditions longer, potentially constraining liquidity but reinforcing macroeconomic stability as reforms take hold.

By Cynthia Ebot Takang