When two interest rates that should move together start moving apart, the gap is telling you something the headline rate will not. In Ethiopia today, the government can borrow short-term money at 12.4 percent while banks lending to one another are paying 19.7 percent. That spread is not a rounding error. It is a reading of where the pressure in the system actually sits.
The National Bank of Ethiopia’s data lays out the tension plainly. Strong private participation is pulling the 91-day Treasury bill rate down even as a liquidity squeeze pushes the interbank rate up — and all of it is happening while broad money grows 39.3 percent year on year. Three numbers, pointing in directions that do not obviously reconcile.
The Two Rates: A Divergence Worth Reading
Start with what each rate measures. The 91-day Treasury bill rate is the price the government pays to borrow short-term from the market. At 12.4 percent, with high private participation, it signals genuine appetite: investors — banks, institutions, increasingly private players — want to hold short-term government paper, and that demand bids the yield down. A falling T-bill rate driven by real participation is, on its own, a sign of a maturing market for government debt.
The interbank rate tells the opposite story. At 19.7 percent, it is the price banks charge each other to borrow overnight or short-term, and a high rate means cash is scarce in the places that need it. When a bank short of liquidity has to pay nearly twenty percent to cover its position, the system is signalling stress, not confidence. The NBE’s monetary policy data holds both readings at once.
Two prices for short-term money, seven points apart, describe one system pulling in two directions.
The Liquidity Squeeze: Where the Cash Is Not
The interbank rate is the honest one here, because it reflects real scarcity rather than appetite for an asset. A rate near 19.7 percent says that liquidity is unevenly distributed — some institutions are flush and lending into government paper, while others are short and paying dearly to fund themselves. That unevenness is the squeeze.
The practical consequences run straight to the real economy. Banks paying high prices to fund themselves pass that cost on; credit becomes more expensive and more cautiously extended, particularly to the smaller and riskier borrowers who feel a tightening first. A business that found a working-capital line straightforward a year ago may find the same bank more hesitant and the pricing harder, not because the business changed but because its lender’s own cost of funds rose. The squeeze is a tax on everyone downstream of a bank’s balance sheet.
When banks pay nearly twenty percent to borrow from each other, the borrower at the end of the line pays for it twice.
The Money-Growth Puzzle: 39.3 Percent in the Background
The figure that complicates the picture is broad money growing 39.3 percent year on year. Intuitively, a rapidly expanding money supply should mean liquidity is abundant — so why is the interbank rate signalling scarcity? The reconciliation is in distribution and intent. Money growing fast in aggregate can still be tight where it is needed if it is concentrated, locked up against reserve and credit requirements, or expanding faster than the system’s plumbing can circulate it.
This is also why the tight policy stance and the disinflation it produced sit logically beside a high interbank rate. The central bank is managing a system in which it must keep money growth and credit from feeding inflation while not starving solvent banks of the liquidity they need to function. A 39.3 percent expansion alongside a 19.7 percent interbank rate is the visible strain of that balancing act — abundance in the aggregate, scarcity at the margin.
A fast-growing money supply can still leave the right bank short at the wrong moment.
The So-What: Price the Squeeze Into Your Plans
For an operator, the divergence between a 12.4 percent T-bill and a 19.7 percent interbank rate is not an abstraction. It is an early warning about the cost and availability of credit. The interbank rate is the leading indicator: when banks are paying that much to fund themselves, borrowers should expect tighter terms, slower approvals and higher pricing to follow, whatever the official policy rate suggests.
The sensible response is to plan for liquidity rather than assume it. Lock in financing before you need it rather than during a squeeze, keep a cash buffer that does not depend on a bank’s mood that quarter, and read the interbank rate as the truer signal of conditions than the gentler government-borrowing rate. The headline tells you what the state pays. The spread tells you what the rest of the economy is about to.
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