BoT pins down bank rates to stabilize rising inflation

By Emmanuel Onyango , The Guardian
Published at 12:48 PM May 15 2024
Bank of Tan
Photo: Courtesy of BoT
Bank of Tan

WEEKS ago, Members of the Monetary Policy Committee (MPC) of Tanzania’s central bank decided to increase its bank rate from 5.5 to 6 percent that is applicable effectively during the second quarter of the trading period which runs from April to June 2024.

The decision by MPC members is entirely based on the macro-economic forecast which requires an increase in the scope of monetary policy actions in order to curb the lingering inflationary pressures arising from global economic developments. 

Economists describe a bank rate as an interest charged by Central Banks to other domestic banks while borrowing funds. This means that, nations charges their bank rates to expand or constrict a nation's money supply in response to economic changes. 

It is a normal phenomenon to see that, more jobs and higher wages increase household incomes and lead to a rise in consumer spending, further increasing aggregate demand and the scope for firms to increase the prices of their goods and services. 

When this happens across a large number of businesses and sectors in local communities, automatically the action leads to an increase in inflation.

Professional economists have highlighted in action some causes of inflation which includes increase in the price of consumable goods as well as raw materials, increase in taxes, decline in productivity, and increase in money supply. 

Inflation is measured by the Consumer Price Index (CPI), and at low rates, it keeps the economy healthy. But when the rate of inflation rises rapidly, it can result in lower purchasing power, higher interest rates, slower economic growth and other negative economic effects.

Whenever a registered bank which operates in the country has a shortage of funds, the Board and its entire management team as a whole can typically borrow from the central bank based on the regulations as stipulated in the monetary policy of a particular country. 

The borrowing is commonly done in the rate at which the central bank lends short-term money to the banks against securities. This is more applicable when there is a liquidity crunch in the market. 

The Bank of Tanzania (BoT) Governor Emmanuel Tutuba said in a recent statement while announcing the newly imposed rates that: “By governing the cost of borrowing money, central banks can either raise interest rates to control high price rates or drop them to spur consumption and economic growth.” 

When central banks lower interest rates, monetary policy is easing. When they raise interest rates, monetary policy is tightening. The operations affect short-term interest rates, which in turn influence longer-term rates and economic activity.

The BoT Chief is of the view that, when the central bank raises interest rates, its goal is to slow down the economy. Raising interest rates will increase the cost of borrowing because loans now come with higher interest rates. This makes the purchase of goods and services on credit more expensive.

In the last report issued by the MPC members, it was noticed that Tanzania is faced with shortage of foreign exchange in the economy and recommended for strict measures to be undertaken in order to increase the supply of the US Dollar so as to stabilize the situation in the near future.

Foreign reserves remained high, an aspect that it has lowered down the local exchange rate which has depreciated by 1.8 percent in the quarter ending March 2024 compared to 1.6 percent in the preceding quarter. 

The MPC members also found out that, “the price of crude oil fetched in the country within the period under review was stable, averaging US$ 80 per barrel, but has recently increased slightly”. The price of gold remained high at around $ 2,071 per troy ounce. 

Zanzibar economy also performed satisfactorily, with real Gross Domestic Product (GDP) growth estimated to be more than 6 percent in 2023, mostly driven by tourism activity. Favourable economic conditions are expected to continue in subsequent quarters of 2024. 

Inflation remained low and stable, averaging 3.0 percent in the first quarter of 2024. This is in line with the country target of not more than 5 percent and convergence criteria in regional economic blocs in which Tanzania is a member. 

Normally every central bank in the world conducts monetary policy evaluation by adjusting the supply of money in the country, usually through buying or selling securities in the open market. 

The Guardian contacted the Chairman of Tanzania Bankers Association (TBA) Theobald Sabi for further clarification, he said: “The banking industry was satisfied with the reasons provided for the rise of the central bank’s key interest rate as the details and reasons behind the decision are well articulated.”

He said despite the increase in rates, the banking sector is currently faced with shortages of foreign exchange such as the US Dollar which are deteriorating in the market, but BoT has introduced stringent measures to harmonize the impeding situation.

“I also want to echo the sentiment from across the banking fraternity on the support that we continue to receive on areas that have so far been challenging including the availability of foreign currencies.” he affirmed when interviewed by the Guardian.

Economic analysts had this in mind when contacted for comments, “with this increment, money borrowers from various banks operating in the country are brooding over the likely impact on borrowing costs.

Clarifying over the matter, the BoT’s Director of Economic Research and Policy Dr. Suleiman Missango, dismissed such claims at a press conference held in Dar es Salaam recently.

He justified the MPC decision saying: “The BoT’s projections showed there would be no risks for banks pulling back to lending to the private sector in favour of buying government securities by the central bank.”

Instead, there will still be an appetite to lending to the private sector and this can be seen by strong private sector whose credit growth remained stronger averaging 17 per cent in the first quarter of 2024.

This is the same as in the preceding quarter, directed to agriculture, mining, transport and manufacturing activities as part of the measures to facilitate private-sector business and investment. Their performance is underpinned by public investment, particularly in infrastructure, 

Private sector investment also contributed to the estimated growth, because of the improving business environment in the country, as reflected by the high growth of credit to the private sector and the increase in foreign direct investment.

The last week’s rise of central bank interest rate to 6 percent for the second quarter of 2024, has a significant milestone, and the move primarily aims to contain inflation within its target and boost Tanzania’s economic growth. 

The demographic money figures issued by other banks in other countries found within East African Community (EAC) shows that Tanzania has the lowest rates compared to other rates as endorsed by their Central Bank’s members of MPC. 

This is also consonant with convergence criteria in EAC regional economic blocs in which Tanzania is a member that stability was due to prudent monetary policy which ensures adequate domestic food supply.

Available statistics from EAC partners states shows that, in January this year the Bank of Kenya raised its bank rates to 13 percent, Rwanda 7.5 percent, whereas in Uganda the rate stands at 10 percent. 

According to the Bank of Burundi the benchmark interest rate has been fluctuating after it was last recorded at 12 percent. Interest rate averaged 9.22 percent from 2007 until 2023, reaching an all-time high of 16.24 percent in July of 2012 and a record low of 5.0 percent in December of 2022.