In a historic move signaling a significant shift in Tanzania's monetary policy landscape, the country is poised to transition from a reserve money policy to a short-term interest rates policy next month. After more than a decade of meticulous preparations, Tanzania is set to join a select group of nations employing this policy, initially implemented by the Bank of New Zealand in 1990.
The decision, approved by the Monetary Policy Committee (MPC) during its Monday meeting, marks a strategic move to control inflation through the manipulation of interest rates. The MPC expressed satisfaction with the progress made by the Bank of Tanzania in adopting this new monetary policy framework, scheduled to come into effect in January 2024.
Under the new policy, Tanzania will focus on targeting short-term interest rates as opposed to reserve money to manage inflation and stimulate economic growth. Typically ranging between 2 and 3 percent, these rates will provide the Bank of Tanzania with a versatile tool to make informed decisions based on a comprehensive set of variables.
Dr. Hildebrand Shayo, an economist and investment banker, posits that this shift is necessary due to the outdated nature of the previous policy and the country's growing interconnectedness with the global financial sector.
“The effectiveness of the old policy may be compromised by the growth of the financial sector and its increasing integration with the regional and global economies,” Dr. Shayo commented to the 'Daily News.'
The move also aligns with the broader harmonization of monetary policies within the East African Community (EAC), where Rwanda, Uganda, and Kenya already utilize this policy framework. The adoption deadline for Tanzania was set for the current fiscal year.
Isaac Lubeja, Zan Securities Advisory and Research Manager, highlighted the strength of interest rates and credit channels in Tanzania, asserting that innovations in short-term interest rates could have a significant and rapid impact on prices. While he anticipates no immediate market impact, Lubeja foresees adjustments in the money market and along the entire yield curve as the market grows and evolves.
Moreover, equities are expected to be repriced following the policy change, influenced by alterations in the discount factor and revised earnings expectations resulting from changes in financing costs and prospective sales.
The shift to an interest rate-based framework brings numerous advantages, including enhanced public awareness of monetary policy positions through the announcement of policy interest rates. It also grants the Bank of Tanzania increased flexibility to respond to macroeconomic shocks by adjusting the policy interest rate and short-term monetary policy.
Presently, the Bank of Tanzania is implementing a less accommodative monetary policy stance, utilizing foreign exchange interventions, statutory minimum reserve ratios (SMR), and other instruments to achieve its macroeconomic objectives. The adoption of an interest rate-based framework is anticipated to enhance the effectiveness of monetary policy and provide the central bank with greater adaptability in navigating economic challenges.