Interest Rate Based Monitory Policy Framework

In this industry update, we provide clarification on the Bank of Tanzania's (the BOT) adoption of the interest rate based monetary policy framework 2017/2018 (the Policy Framework).

Contrary to popular belief, the Policy Framework does not place caps on interest rates. In a document dated 18 December 2017 published on the BOT website, the BOT clarified that the Policy Framework targets interbank cash market rates which is the rate at which banks lend money to each other.

The BOT's central role is to ensure stability of prices which is done by:

monitoring CPI Basket which focuses on inflation; monitoring prices which focuses on interest rates; and monitoring foreign currency which focuses on exchange rates. The Policy Framework outlines the BOT's decision to either increase or decrease the flow of money into the country. The Policy Framework published on 17 June 2017 indicates the BOT's decision to move from providing quantitative based policy frameworks to providing price based policy frameworks. This means that instead of providing targets that speak of increments/decrements in Tanzanian shillings (i.e. in relation to the average quantity of reserve money), the BOT will indicate an increase or decrease using the per cent interest rate. In essence, the language used by the BOT has changed.

The BOT sees this change from quantitative targets to interest rate targets as beneficial to the market as it is less technical to calculate and therefore easier for the public to better understand the Policy Framework.

It has also been indicated that the introduction of the Policy Framework will increase competition in commercial banks by ensuring...