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Experts: Tighten monetary policy to contain inflation

29th December 2011
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Street vendors carry out their business along Kawawa Road in Dar es Salaam, as captured by our photographer yesterday.(Photo: Correspondent Sabato Kasika).

The government has been urged to further tighten monetary policy in order to contain the inflationary pressures.

According to Tanzania Knowledge Network (Taknet) forecast inflation will continue to rise, peaking at the end of this year.

They said the monetary policy tightening will slow down real growth to about 5 percent in 2012.

The real slowdown will be relatively moderate owing to positive structural developments on the back of Foreign Direct Investment (FDI) inflows and rising investment into mining industry.

“Despite these structural improvements, country fundamentals remain weak and we assume that the country will experience only mild real exchange rate appreciation,” they said.

The Bank of Tanzania (BoT) might be reluctant to tighten its policy stance further, preferring to seek to promote credit growth and the real economy, analysts say.

The Tanzanian shilling has depreciated by about 13percent since the beginning of the year, which is above the average depreciation trend of 5 percent over the last decade. The actual depreciation pressures reflect soaring inflation and the excessively loose policy stance.

Inflation has accelerated to 13.7 percent in third quarter of the year 2011 mainly owing to food and energy prices.

Besides high world food and oil prices, soaring inflation mirrors local food and electricity shortages.

Tanzania, like its EAC partners, is a water-dependent economy and prolonged droughts this year have raised food and energy prices by 16.7 percent and 33 percent, respectively, in third quarter of this year.

Despite double-digit inflation, the BoT kept interbank rates at low levels until the second half of October as it followed its announced targets for money growth.

According to the experts, the central bank might have considered inflation pressures to be temporary, but the policy was too accommodative until recently.

They noted that the combination of negative supply shocks and loose monetary policy has exacerbated the depreciation pressures, they said.

Their forecast assumes that the central bank will tighten its policy further to restrain the depreciation pressures and to keep inflation expectations under control. As a result, real growth will slow down.

In a response to the depreciation and perceived inflation pressures, the BoT raised discount rates to 9.6 percent and increased the cash reserve requirements on government deposits at its meeting held in October.

As a result, money market interest rates increased to 12 percent and the depreciation pressures on the nominal exchange rate eased in the last week of October.

SOURCE: THE GUARDIAN
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