IMF nods to BoT's anti-inflationary drive

International Monetary Fund (IMF) has welcomed Bank of Tanzania’s (BoT) commitment to tame inflation.
IMF, in its sixth review under the Policy Support Instrument, says: “IMF welcomes BoT’s commitment to take further measures against inflation and encourages the authorities to complement the current reserve money framework with a more active use of interest rate.”
The monetary policy for the remainder of 2013, according to the central bank, aims at reducing the reserve money growth to attain the targeted inflation rate of seven per cent by the end of December 2013.
The average reserve money is set to decline from 14.2 per cent at the end of this month to 10.8 per cent by December 2013, with likely increasing real interest rates like interbank and repo rates, toward positive levels. Credit growth is also expected to slow down for the remainder of 2013, from 17.4 per cent to 15.2 per cent.
However, additional inflationary pressures could stem from the large wage bill increase envisaged in the 2013/14 national budget. Looking ahead, the BoT is mindful of limitations of strict adherence to reserve money targeting and its implications for interest rate volatility.
Preliminary work is underway on the design of a more forward looking, flexible monetary policy framework with a more active use of the policy rate.
IMF recommends enhancement of the degree of exchange rate flexibility. With the current account deficit projected to remain large into the medium term and continued vulnerability to real or financial shocks, the exchange rate should be allowed to play its important role as a shock absorber.
The government has reaffirmed its commitment to a market-determined exchange rate with interventions limited to smoothing short-term fluctuations. The authorities considered that avoiding temporary fluctuations stemming from sentiment was important to prevent irrational momentum and volatility in the market.
They considered that the relative stability of the exchange rate was consistent with fundamentals and a reflection of restored market confidence. It was also felt that, as a by-product, a stable exchange rate helped in the disinflation process.
In view of the large current account deficit and declining inflation, staff encouraged the authorities further to enhance exchange rate flexibility, noting that this would be an appropriate response in the event of renewed pressures on the exchange rate.
The moderate tightening of monetary policy undertaken in this review for the remainder of 2013 is consistent with enhanced exchange rate flexibility.
Source: The Daily News, reported from Dar es Salaam
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