Bank of Tanzania's policy stabilizes inflation, economists urge broader measures

BoT Governor Emmanuel Tutuba.

What you need to know:

  • Economists stress the need for a balanced approach that also considers the dynamics of foreign currency supply and broader economic indicators

Dar es Salaam.  The Bank of Tanzania’s (BoT) monetary policy adjustments have proven effective in managing the money supply and keeping inflation under control.

However, economists stress the need for a balanced approach that also considers the dynamics of foreign currency supply and broader economic indicators.

In April 1, 2024, the BoT raised the central bank rate (CBR) to 6 percent from 5.5 percent to curb inflationary pressures arising from global economic developments.

The BoT’s Monthly Economic Review (MER) report for May 2024 has now highlighted the positive impact of the new rate.

It stated that by the end of April 30, 2024, the extended broad money supply (M3) grew at 10.9 percent in April 2024, a rate that was lower than 13.8 percent of the previous month and 17.2 percent in the same month of 2023.

M3 comprises currency in circulation outside the banking system and deposits of residents with banks, including foreign currency deposits.

“During the period under review, the monetary policy implementation aimed to ensure that the 7-day interbank cash market (IBCM) interest rate remained within the CBR corridor of +/- 200 basis points. This objective was successfully achieved, with the 7-day IBCM interest rate fluctuating within the established corridor,” the central bank noted.

In addition to controlling the money supply, the country’s twelve-month headline inflation also remained lower compared to the country’s target of 5 percent, consistent with convergence criteria in the East African Community (EAC) and Southern African Development Community (SADC) regions.

“The inflation rate was 3.1 percent in April 2024, a slight increase from 3 percent in the preceding month,” the report read in part.

Food inflation was steady at 1.4 percent in April 2024, similar to the preceding month, as the country continued to have a sufficient food supply.

Thus far, prices of main food crops have been low and are expected to be moderate throughout the 2024 trend. This is further supported by satisfactory food stocks held by the National Food Reserve Agency (NFRA), reaching 340,102 tonnes in April 2024 from 63,808 tonnes in the corresponding period in 2023.

Speaking to The Citizen, an independent financial analyst, Christopher Makombe, said it’s true that an increasing interest rate leads to a tight money supply and eventually supports the local currency.

However, he said the recent depreciation of the shilling is more driven by demand for the US dollar, as the implementation of strategic projects and higher import bills require the US dollar to pay suppliers.

“Local unit money supply is not a key driver; we need to think around areas of increasing dollar supply in order to further support the shilling,” he said.

Finance analysis from the University of Dares Salaam (UDSM), Dr Thobias Swai, first elaborated on the function of the central bank rate.

“The central bank rate is the interest rate at which a nation’s central bank, in this case, the BoT, lends money to domestic banks, often in the form of very short-term loans. Managing the bank rate is a method by which central banks can affect economic activity,” he said.

Dr Swai emphasised the dual nature of bank rates, stating that lower rates can help expand the economy by reducing borrowing costs, while higher rates can help curb the economy when inflation is higher than desired.

He also raised questions about the recent rate increase.

“We need to understand why the rate was increased to 6 percent. Were there signs that our inflation was higher than desired? Also, what measures the money supply, and how best can we measure it? One way is the demand for Treasury bills and bonds, which has been quite high, sometimes 3x the offer, over the last three months,” he said.

Dr Swai also pointed out that the effectiveness of the central bank rate depends on the demand for loans from banks.

“We need to check if banks are taking loans from the central bank. The rate can be impactful only if there is demand for such loans; otherwise, it’s hard to explain its impact,” he added.

The data showed that by the end of April 2024, private sector credit growth remained robust at 17.6 percent, slightly exceeding the 16.8 percent recorded in the previous month.