The National Bank of Ethiopia (NBE) has set its initial policy interest rate at 15 percent, setting the rate by accounting for inflation, low base money growth, and a marked slowdown of bank credit growth over the past year.
The National Bank policy rate (NBR) is close to what banks currently lend to each other and is somewhat below commercial bank lending rates, which are in the range of 16-20 percent for most loan categories.The NBE will start conducting monetary policy related auctions every two weeks and introduce electronic platforms to banks for lending and borrowing.The apex bank said it is also introducing an overnight lending facility and an overnight deposit facility for banks that might need to manage their liquidity positions over a one-day time horizon.The facilities, known formally as standing facilities, will be offered at the NBR rate plus or minus 3 per cent.
“The NBR is not meant to fix or set interest rates in the banking sector, which remain determined by the competitive interactions among banks and their clients. The minimum savings rate of 7 percent is not affected or currently being changed by the introduction of the NBE policy rate,” NBE said in a statement.
As part of modernizing its monetary policy framework and aligning policy tools with global best practices, NBE announced other five reforms.
“The money market, once fully operationalized via a web-based online platform, will allow liquidity-surplus banks to provide funds to liquidity-short banks on a continuous basis, thereby allowing shortage or surplus conditions at specific banks to be addressed within the banking system and without the need for central bank intervention,” the NBE added, “It is expected that interest rates in the interbank market will align with the NBR but, should this not be the case, the NBE will intervene using OMO auctions (as outlined earlier) to ensure that the interbank interest rate converges to the NBR.”
NBE added that it will use the OMO auctions to inject liquidity into the banking system. The first OMO auction is scheduled for July 11, 2024.
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