BoT’s plans for interest targeting under way - Governor

The Bank of Tanzania is moving cautiously to interest rate targeting from reserve money to avoid policy disruption as the level of money markets is still low.

The interest rate targeting is important since the broad money grows significantly while credit to the private sector is also surging rapidly leading too much money in circulation to control by using reserve money policy.

Central banks mainly use reserve money, unlike interest rate issued by a central bank, control inflation by auctioning treasury bills to reduce liquidity in the economy.

BoT Governor, Prof Benno Ndulu (pictured), said on Wednesday  although the migration was a long process preparations of some of the components have started and were at advanced stages.

“We have started to implement some of the items,” Prof Ndulu told the ‘Daily News’ by phone from Davos, Switzerland where he is attending the World Economic Forum. 

He said the migration had to take into account the East African Community Monetary Union protocol as well, that is geared to converging macroeconomic fundamentals of five member states before adoption of a single currency.

The BoT Director of Economic Research and Policy, Dr Joe Masawe, said they had completed phase one of staff training in collaboration with IMF and they were currently entering the second leg of training.

“After that we will embark on staff seminars as this is a new framework,” Dr Masawe told the ‘Daily News’. 

“It will be followed by a setup of the department which will deal with interest targeting…we move to that direction at a good pace but cautiously.” 

He said the central bank would not pull out of reserve money gradually until the markets behaved according to the new changes.

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

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

In that vein, BoT said they could not issue a date during the transitional period to enable banks and other money markets players to understand when central bank tightens and eases interest rates.

In EAC, Kenya, Uganda, Rwanda are either in transitional or preparation stages towards interest rate targeting. 

Kenya has reached an advanced stage after it started issuing the official interest rate since August 2005 at the Central Bank Rate (CBR), which replaced the 91-day Treasury Bill (TB) rate. But, according to Dr Masawe, the East African country leading economy is still at a transitional stage.

The Bank of Uganda, since July 2011, reformed its monetary policy framework to entail the transition to an inflation (interest) targeting monetary policy framework. Rwanda also last year embarked on the policy. Burundi status was not immediately available.
Source: Daily News, reported by Abduel Elinaza from Dar es Salaam, Tanzania

Share on Google Plus

About Abduel Elinaza

This is a short description in the author block about the author. You edit it by entering text in the "Biographical Info" field in the user admin panel.