What has changed as Tanzania adopts new monetary policy

The shift to an interest rate-based monetary policy is meant to align Tanzania with international best practices.

“The adoption of this framework will improve the effectiveness of monetary policy in maintaining low and stable inflation and facilitating economic activities. The framework is also in alignment with the country’s commitment to harmonising monetary policy frameworks in the East African Community and other regional economic communities in which Tanzania is a member,” BoT governor Emmanuel Tutuba said in a statement.

Under the new framework, the BoT will set the policy rate, known as Central Bank Rate (CBR), consistent with low and stable inflation and conducive for the growth of the economy.

A change in the CBR will signal the direction of the monetary policy – either a tightening or expansionary monetary policy stance.

The CBR will also be used as a guide for the determination of interest rates.

The interest rate to be targeted in the new framework will be the interbank cash market rate, which is the rate at which banks lend to each other.

Mr Tutuba warned that the interest rate-based monetary policy framework should not be confused with interest rate capping, which constitutes a mandatory requirement that interest rates should not exceed a certain limit.

Interest rate capping interferes with the functioning of the market, leading to inefficient allocation of financial resources.

“The public is advised to note that the adoption of the interest rate-based monetary policy framework does not imply fixing of interest rates offered by banks and other financial institutions. The interest rates will continue to be determined by market forces in line with other economic policies of the country,” he said.

Economist Oscar Mkude said technological advancement has changed the way people possess and keep money.

He noted that people can now have money in their pockets, banks and even in mobile money wallets and financial applications.

Mr Mkude said a nation’s monetary policy depends on the economic conditions at a particular time and the goals of the central bank.

“The shift in policy framework is necessitated by changes in our economy.”

However, there is no noticeable change in ordinary citizens’ lives, Mr Mkude added.

“This will only be noticed by those active in financial institutions in terms of adjustments to comply with the new policy framework.”

An independent economist, Mr Christopher Makombe, said interest rate-based policy is globally used by major banks.

He said the central bank will be able to influence spending and borrowing behaviour by adjusting the central bank rate, which will be used as one of the factors for pricing loans by commercial banks.

“By going the global way in monetary policy management, it will improve clarity and openness in Tanzania's financial markets and therefore attract more foreign investors into its markets,” he said.

Mr Makombe further noted that it will improve flexibility as the central bank will be able to quickly respond by increasing or decreasing the central bank rate, depending on changes in inflation.

“A word of caution, though. The new approach must be accompanied by improved accuracy in forecasting, timing and monitoring of economic data and indicators from which decisions on interest rate levels will be based,” he said, adding that correct data will help to ensure that interest rate levels in the market reflect the economic reality on the ground.

Dr Donald Mmari, executive director of research think tank Repoa, Dr Donald Mmari, said interest rate-based monetary policy is a more effective tool of regulating the economy.

“This encourages investments in Treasury securities (bonds and bills) to reduce the money supply in the economy as a way of controlling inflation,” he said.