The National Bank of Ethiopia has completely removed the annual credit growth ceiling imposed on commercial banks, marking a major shift away from direct lending restrictions towards a market-based monetary policy system.

The decision was approved by the central bank’s Board of Directors following the seventh regular meeting of the Monetary Policy Committee held on July 13, 2026.

The credit cap had limited the amount by which individual commercial banks could expand their loan portfolios each year. It was introduced as a temporary measure to restrain excessive monetary expansion and ease inflationary pressures.

NBE said the credit cap had served its intended temporary purpose and that its removal reflected the central bank’s transition from direct controls to indirect, market-based monetary policy instruments, including the policy interest rate and targeted reserve requirements.

“The cap was introduced in 2024 as a temporary measure to contain credit growth while this transition was under way,” NBE Governor Eyob Tekalign said. “It has served that purpose, and its removal reflects the fact that the Bank now has a functioning interest-rate-based framework at its disposal.”

“I want to be explicit on this point: this is a change in instrument, not a change in stance,” Eyob said.

The removal gives commercial banks greater discretion to determine the size and composition of their lending portfolios. However, the central bank introduced several accompanying measures intended to prevent a rapid increase in credit from adding to inflationary and foreign-exchange pressures.

NBE raised its central policy rate by one percentage point, from 15 percent to 16 percent, signalling a tighter monetary policy stance. The interest-rate corridor will remain three percentage points above and below the policy rate.

“Because removing the cap on its own would ease pressure on credit growth, the Committee judged that an offsetting measure was required to keep the overall policy stance tight,” Eyob said.

“The rate increase and the removal of the cap should therefore be read together: one instrument is retired, and the other is strengthened, so that the net effect is a monetary stance that is, if anything, tighter than before.”

The central bank will also introduce targeted reserve requirements for individual commercial banks based largely on their loan-to-deposit ratios. Banks recording faster credit growth relative to their deposit mobilisation could therefore face higher reserve obligations.

The mechanism is expected to allow NBE to control lending risks at the level of individual institutions rather than imposing a uniform credit-growth ceiling across the banking industry.

“This gives the National Bank a precise instrument to act on individual banks, rather than the economy-wide constraint the credit cap once provided, should credit expansion in any part of the system begin to threaten the inflation outlook,” Eyob said.

In a separate move, NBE reduced the mandatory foreign-exchange surrender requirement for commercial banks from 50 percent to 30 percent. Under the requirement, banks must surrender a portion of the foreign currency they collect to the central bank.

The reduction will allow commercial banks to retain a larger share of their foreign-exchange earnings, potentially increasing the amount of hard currency available through the banking system.

Eyob said the reduction was intended “to strengthen export competitiveness, deepen the foreign exchange market, and improve price discovery.”

NBE also lowered the commission it charges on foreign-exchange transactions from 2.5 percent to 1.5 percent, a measure expected to reduce transaction costs associated with import and export activities.

The governor said the commission reduction would “lower import-related costs and contain the pass-through of external prices into domestic inflation.”

The changes represent one of the most significant adjustments to Ethiopia’s monetary policy framework since the government began implementing broad macroeconomic and foreign-exchange reforms.

While the removal of the credit ceiling could support lending to businesses and households, rapid credit expansion could also increase the money supply and add to inflation unless banks expand lending cautiously and strengthen deposit mobilisation.

The central bank said Ethiopia’s economy continued to demonstrate resilience, supported by activity in the agriculture, industry and services sectors, despite domestic inflationary pressures and uncertainty in the global economy.

The latest package indicates that NBE intends to rely increasingly on the policy interest rate, bank-specific reserve requirements and other market-based tools to manage liquidity and maintain price stability.

“Taken together, these five measures reflect one consistent judgment by the Committee: that Ethiopia’s monetary framework has matured to the point where it can rely on indirect, market-based instruments,” Eyob said.

He added that this maturity “must be matched by continued discipline, not by any easing of our resolve on inflation.”

Commercial banks will now have greater lending autonomy, but their credit expansion will remain subject to tighter monitoring and institution-specific regulatory requirements.