Tanzania’s economic evolution: Navigating from reserve money to short-term interest rates.

Tanzania’s economic evolution: Navigating from reserve money to short-term interest rates.

Tanzania is making a significant shift from a reserve money policy to a short-term interest rates policy next month after a decade of preparations. The Monetary Policy Committee (MPC) has approved this move to control inflation using interest rates, aligning with global practices.

The new policy, focusing on short-term interest rates, is a departure from traditional methods and aims to support economic growth. Experts suggest that interest rates in this framework typically range between 2 and 3 percent, providing a versatile approach for monetary policy.

Economist Dr. Hildebrand Shayo notes that this transition is necessary due to the outdated nature of the old policy, especially considering the growth of the financial sector and its integration with the global economy.

The shift also aligns Tanzania with the East African Community (EAC) countries, including Rwanda, Uganda, and Kenya, which already follow this policy. Zan Securities Advisory’s Isaac Lubeja emphasizes the strength of interest rates and credit channels in Tanzania.

While immediate market impacts may be limited, experts anticipate changes in the money market as it grows and deepens. Isaac Lubeja suggests that equities may be repriced, reflecting alterations in the discount factor and earnings expectations due to changes in financing costs.

The advantages of inflation targeting include transparency in monetary policy positions, providing flexibility for the Bank of Tanzania to respond to macroeconomic shocks through adjustments in interest rates and short-term monetary policies.

Currently, the Bank of Tanzania implements a less accommodative monetary policy, using foreign exchange interventions and statutory minimum reserve ratios. The shift to an interest rate-based framework is seen as a strategic move to potentially enhance the effectiveness of monetary policy and provide the central bank with greater flexibility.