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What interest rate-based monetary policy means
The Bank of Tanzania twin towers in Dar es Salaam. PHOTO|FILE
What you need to know:
- In the context of Tanzania, it (the monetary policy) consists of decision taken by BoT in its efforts to influence the amount of money supply in the economy and the cost of borrowing.
- The decisions, taken after a thorough analysis of the country’s economic condition, enable BoT to achieve Tanzania’s inflation objectives in consideration of the output growth.
Dar es Salaam. The Bank of Tanzania (BoT) will officially adopt an interest rate-based monetary policy next January as part of its efforts to maintain the right amount of money supply in the economy and spur growth.
A monetary policy is a tool set by a nation’s central bank to control the overall money supply and promote economic growth and employ strategies such as revising interest rates and changing bank reserve requirements.
In the context of Tanzania, it (the monetary policy) consists of decision taken by BoT in its efforts to influence the amount of money supply in the economy and the cost of borrowing.
The decisions, taken after a thorough analysis of the country’s economic condition, enable BoT to achieve Tanzania’s inflation objectives in consideration of the output growth.
As part of its day-to-day operations, BoT assesses the level of liquidity in the banking system and decides on the magnitude, type and maturity of instruments to be deployed for liquidity management.
In line with a Monetary Policy Statement for 2017/18 published in June 2017, BoT governor Emmanuel Tutuba said in a statement yesterday that the interest-rate based monetary policy will be officially adopted in January 2024.
He said the decision to adopt an interest-based framework stems from the fact that it (the policy) started to be used by countries in 1990s and currently it is used by 45 central banks around the world.
"This is to maintain price stability, which is defined as a low and stable rate of inflation over time," he said.
BoT said in 2017 that the in line 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. It will be undertaken in such a way that BoT will set and announce a policy rate and take actions in the interbank cash market to keep the interbank cash market rate as close as possible to the policy rate.
And, to ensure a smooth and effective implementation of the new monetary policy framework, BoT has prepared the Operational Guidelines for Interest Rate-Based Monetary Policy Framework which seek to provide necessary information to stakeholders to understand the monetary policy objectives, processes and procedures involved.
They are meant to provide clarity on the manner in which the monetary policy will be formulated and implemented as well as assisting stakeholders to plan for their operations and enhance transparency and accountability in the conduct of monetary policy.
Mr Tutuba said BoT will continue to engage stakeholders to foster a deeper understanding of the new monetary policy framework with the ultimate goal of achieving price stability and supporting the sustainable growth of the economy.
Tanzania targets its inflation rate to evolve within five percent in the medium-term period of 3 to 5 years.
The target is consistent with regional economic communities in which the country is a member. The inflation target is considered appropriate to support the sustainable growth of the economy.
However, due to shocks to the economy, actual inflation may temporarily deviate from the target range in a year.
To achieve the objective of monetary policy, the Bank focuses on maintaining an adequate level of liquidity in the economy and ensuring the stability of short-term interest rates and exchange rates Committee (MPC), which include policy rates, are communicated to banks through post-MPC meetings with chief executive officers of banks and the public through the media.
Analysts say the decision is good and that it requires commercial banks to maintain high liquidity levels.
A senior lecturer at the University of Dar es Salaam’s Business School, Dr Tobias Swai, said the implication is that apart from being compelled to strengthen their liquidity positions, commercial banks will also have to formulate strategies which will make them liquid at any time as the interest rate will be the determinant factor.
He said the banks will take stringent measure to ensure that they operate within limits, offering more sound loans.
"Depending on the volume traded currently, this may result to lower bank profits which are arising from this business segment. It may also force banks to innovate to more financial products and services that will drive deposits and offer more sound loans as well as ensure that there is close monitoring of the loans to reduce non-performing loans," he said.
He said the target of the new policy would be for seven-day and overnight interbank loans where commercial banks normally borrow from each other to meet liquidity or regulatory requirements.
An economist, Mr Oscar Mkude, shared similar sentiments, saying the interest rate based monetary policy requires a financial sector that is stable.
