BoT ushers in new interest-based monetary era

Dar es Salaam. The Monetary Policy Committee (MPC) has set 5.5 percent as the Central Bank Rate (CBR), or policy rate during the first quarter of 2024.

The rate commences Friday, January 19, 2024, involving Commercial Banks and Interbank Cash Market (IBCM) that lend from the Bank of Tanzania (BoT).

The policy rate comes a few days after BoT adopted a new Monetary Policy Framework (MPF), known as the interest rate or price-based monetary policy framework.

The adoption represents a shift from the quantity of money (monetary targeting) to interest rate which is a reform embraced in the financial sector aimed at improving the effectiveness of the monetary policy.

The MPC’s decision on the CBR rate considered the need for containing inflation within the medium-term target of five percent, while supporting economic growth to reach and exceed 5.5 percent in 2024 and ensure a stable exchange rate.

BoT Governor Emmanuel Tutuba said the MPC during the first-ever meeting held on January 18, 2024, endorsed commencement implementation of MPF using interest rate.

He said the MPC noted that transition from monetary targeting to an interest rate was a significant milestone in the country’s monetary policy transformations.

“The forward-looking framework is expected to improve the effectiveness of monetary policy in the changing economic environment. It is also a fulfilment of the country’s commitment to the implementation of the East African Community (EAC) Monetary Union Protocol,” he said.

"After a detailed assessment of the recent performance of the economy and its outlook, the MPC decided to use monetary policy instruments to align the 7-day interbank rate, the operating targeting variable, within +/-200 basis points of the policy rate," he added.

He noted that the recent economic performance and outlook in assessing the recent performance and outlook of the economy, the MPC observed that the global growth was weak in 2023, and is projected to persist in the first quarter of 2024, largely due to geo-political tensions, tightening monetary policy, and heightened economic uncertainties.

Furthermore, Governor Tutuba said inflation continued to decline in many countries in the wake of monetary policy tightening, noting nonetheless that in advanced economies, it remained above the two percent target.

Inflation is expected to continue falling in many countries, he said, noting that in advanced economies, it could remain above the two percent target in the first quarter of 2024.

“This might prompt the central banks to continue upholding tight monetary policies, albeit with less intensity, because of growth concerns,” he said.

In the EAC and Southern African Development Community (Sadc) blocs, he said most countries experienced below convergence criteria of a maximum of eight percent and three to seven percent inflation respectively.

According to him, commodity prices remained volatile, but lower compared to the preceding year with both demand- and supply-side factors driving the movement of prices.

He said the price of oil declined in the fourth quarter of 2023 due to subdued demand, adding that oil prices are expected to decline in the first quarter of 2024.

However, he said there is an upward risk to the projection in case OPEC maintains the stance of production cut, with the ongoing risks caused by geopolitical tensions.

“Economic performance was satisfactory in 2023, reaching 5.3 percent in the third quarter and is projected to reach 5.4 percent in the fourth quarter,” he said.

He said Zanzibar’s economy grew at seven percent, noting that there was a high possibility of attaining the 7.1 growth projections for 2023.

According to him, the performance of the domestic economy was reinforced by public investment and policies geared towards improving the business environment for the private sector, noting that in Mainland Tanzania was projected to record a 5.2 percent growth in the first quarter of 2024.

For his part, the Tanzania Bankers Association (TBA) Vice Chairman, Mr Geoffrey Mchangila reaffirmed commercial banks’ collaboration in creating awareness of members and the general public.