18 February 2013

Tanzania: Economists for Interest Rate Targetting

POLICY shift from reserve money to interest rate targeting is expected to reduce the cost of borrowing as lending interest rates will be pegged on the Bank of Tanzania (BoT) benchmark.

This means, banks will use the BoT rate as the benchmark on pricing the costs of a loan unlike current scenario where Treasury bills yield rates are used. T-bills on other hand are fluctuating with inflation rates thus making loans expensive. But on other hand the BoT rates are expected to stabilize over time.

The Barclays Bank Tanzania (BBT) Managing Director, Mr Kihara Maina, said recently that the shift of policy from reserve money to interest rates targeting was most welcome as it would assist in one way or another in lowering lending costs. "As opposed to reserve money this interest targeting is a good move," Mr Maina said when presenting to media last year's financial results last week.

He said banks will use the rate as benchmark unlike the current trend, where Treasury Bills yields are applicable. Other money market, according to experts, would reflect the central bank's interest rate to leverage their interest or yields rates. The BoT Director of Economic Research and Policy, Dr Joseph Masawe, said although money targeting works well, it was still not perfect than interest rates policy.

"The economy now works in the different era, (thus) spearheading migration to targeting interest rates from money, which has positive challenges," Dr Masawe said recently. The challenges include developing further the money markets such as Dar es Stock Exchange (DSE) and Inter- Bank Foreign Exchange Market (IFEM), which normally fluctuate in either direction on central bank interest rates.

"Actually we (BoT) are phasing out reserve money policy and bringing in interest rates policy (and) to sensitize the money markets players on the shift," Dr Masawe said. Last week, the Minister for Finance and Economic Affairs, Dr William Mgimwa said there was need for the banks to revisit their calculations on lending rates to lower their costs.

He urged, when opening a Bank of Africa branch in Kahama, Shinyanga, that high lending costs are chocking the economic growth of this land. Economists urge that there is negative impact of high rates. This is because high interest rates are not good for borrowers. They increases costs of borrowing, cost of doing business using borrowed money and by extension it fuels inflation and holds economic growth back.

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