BoT makes strides on interest targeting shift

Tanzania is inching closer from switching to interest rate targeting from reserve money policy as one of the top most component that has been addressed.

The Bank of Tanzania said building human capacity to handle the portfolio is at advanced stage and expected to be completed in the near future, but the main challenge is preparing the markets to adopt the new move.

The BoT Director of Economic Research and Policy, Dr Joe Masawe (pictured), told the ‘Daily News’ that currently they were studying to get experiences from various institutions, in and outside the country on the best mode. 

“The challenge ahead is to elevate our markets to understand the new method of correcting money in circulation using (central bank) interest rate.

“I can’t give you an exactly date of switching from reserve money to interest rate…it will take some time…but the bottom line is to adopt a workable policy, smoothly,” Dr Masawe said over phone.

The director said during this transit period they would gradually phase out reserve money, which use treasury bills rate, while at the same time introduce interest rate target policy, trying to avoid money market interest rates disequilibrium.

The BoT’s said the exercise to determine the best method to integrate money markets— such as Dar es Salaam Stock Exchange—were conducted using think tanks from country’s top universities, other central banks in advanced economies and International Monetary Fund (IMF).

“We want to learn from other central banks that are using this policy (interest targeting) successfully…so as to perfect ours,” he said. 

The fast economic growth in Tanzania has made the central bank switch from reserve money to interest rate targeting policy, which economists claim to be a more beneficial approach.

The growth has driven the country’s into a more sophisticated economy, to create challenges under money targeting policy on tackling liquidity supply in circulation slowing down effort to curb inflation at a desired pace. 

Experts said policy shift from reserve money to interest rate targeting is expected to reduce the cost of borrowing as lending interest rates will be pegged on the Bank of Tanzania (BoT) benchmark.

This means, banks will use the BoT rate as the benchmark on pricing the costs of a loan unlike current scenario where Treasury bills yield rates are used. 

T-bills on other hand are fluctuating with inflation rates thus making loans expensive. But on other hand the BoT rates are expected to stabilize over time.

Other money market, according to experts, would reflect the central bank’s interest rate to leverage their interest or yields rates. 

In those veins, BoT said they could not issue a date during the transitional period to enable banks and other money markets players to understand when central tightens and eases interest rates.
Source: Daily News, reported from Dar es Salaam, Tanzania
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