Ethiopia MPC retains key rate at 15% to tame inflation

The Central Bank of Ethiopia has decided to retain the benchmark lending rate at 15 per cent during its recent Monetary Policy meeting. This move is aimed at securing inflation expectations and stabilizing the economy amidst ongoing changes in the monetary policy landscape. The next Monetary Policy Committee meeting is scheduled to take place at the end of June 2025. Mered Fikireyohannes, the Founder and CEO of Pragma Advisory Group, joined CNBC Africa to shed light on the implications of this decision. Reflecting on the committee's actions, Fikireyohannes highlighted key points that underscore the ongoing transition in Ethiopia's monetary policy. One key focus area is the maintenance of an 18 per cent credit cap on banks' balance sheets to control credit growth. This measure, initially set at 14 per cent, has been revised recently to manage economic dynamics effectively. Furthermore, Fikireyohannes emphasized a gradual decline in the inflation rate, which is currently hovering around 15 per cent. The committee aims to steer inflation towards a single-digit figure in the near future. As part of the tightening strategy, the Monetary Policy Committee is committed to sustaining these policies in the months ahead, aligning with the broader economic reform agenda. Addressing the foreign exchange market, Fikireyohannes discussed the fluctuating performance of the Ethiopian Birr (BIR) against the US dollar. With the BIR averaging around 130 per dollar and experiencing a recent spike to 135 BIR, the Central Bank intervened with a special auction to stabilize the exchange rate. Despite adequate foreign currency reserves, banks are imposing higher commission fees of 7 to 10 per cent, influencing exchange rates beyond official benchmarks. The CEO noted the close monitoring of these developments by the Central Bank's Monetary Policy Committee, given the impact on non-food item prices and overall market stability. As Ethiopia transitions towards an interest-based monetary policy framework, the continuity of the credit cap until September is expected to mitigate potential forex demand pressures post-implementation. While the market continues to adapt to changing dynamics, Fikireyohannes emphasized the importance of prudence in managing exchange rate volatility and sustaining the economic trajectory. The evolving landscape necessitates a strategic approach to align monetary policy measures with broader economic objectives, fostering stability and growth in Ethiopia's financial ecosystem. In conclusion, the decision to maintain the key rate at 15 per cent reflects a proactive stance by the Central Bank in managing inflation and fostering stability. As Ethiopia navigates through economic reforms and transitions, insights from experts like Mered Fikireyohannes provide valuable perspectives on the strategic direction of monetary policy and its implications for the country's economic outlook.