Ethiopia's Reserve Money Surges 87% on Gold Buying

Ethiopia's National Bank (NBE) reported a significant surge in reserve money growth, reaching 87.2% year on year in the first quarter of 2026/27. This marks a substantial increase from 72.6% in the same period last year. The growth is primarily attributed to the central bank's gold purchasing activities, which have expanded the monetary base and injected birr liquidity into the banking system.

The NBE's gold buying spree has become a primary channel for monetary expansion, making reserve-money growth less dependent on domestic credit alone. Each gold transaction increases the NBE's net foreign assets while placing Ethiopian birr directly into suppliers' bank accounts, creating liquidity even when the bank maintains a restrictive policy stance. This development has raised questions about monetary-policy transmission and the central bank's capacity to absorb excess liquidity.

The NBE held its policy rate at 16% on November 3, 2026, and maintained a plus-or-minus 300-basis-point corridor, running from 13% to 19%. Despite keeping the policy signal firm, the central bank faces a greater burden on liquidity operations to manage excess liquidity. The bank plans to strengthen indirect monetary operations and absorb excess liquidity through targeted reserve requirements, calibrated to individual banks' credit-to-deposit ratios.

The liquidity surge has implications for investors, as it tests the NBE's ability to contain excess liquidity without pushing short-term rates sharply higher. Open-market operations have grown more costly as excess liquidity stays concentrated in the system. Foreign-exchange sales offer a partial offset, but their effectiveness depends on available foreign-currency supply and the central bank's reserve position.

A similar trend is emerging regionally, with the Bank of Mozambique integrating domestic gold into its reserve strategy. This signals a broader African trend of gold-driven reserve management. In Ethiopia, annual inflation stood at 14.9% in September 2026, keeping the inflation constraint firmly in view. Gold purchases support foreign assets and domestic producers but also expand the monetary base, creating a tension that the NBE must actively manage.

The NBE's next operational moves will determine whether liquidity can be contained without choking credit growth. Investors should watch the NBE's liquidity operations and short-term yields closely. The central bank's policy statement also reported broad money growth of 40.2% year on year in Q1 2026/27, with outstanding bank credit rising 42.6% over the same period.

The surge in reserve money growth driven by gold purchases has become the central monetary-policy challenge in Ethiopia. The NBE must balance supporting foreign assets and domestic producers with managing excess liquidity and containing inflation. The bank's ability to navigate these competing objectives will be crucial in determining the effectiveness of its monetary policy.

Key points

• Gold buying drives money creation, expanding the monetary base and injecting birr liquidity into the banking system.
• The NBE plans to strengthen indirect monetary operations and absorb excess liquidity through targeted reserve requirements.
• Annual inflation stood at 14.9% in September 2026, keeping the inflation constraint firmly in view.