21 February 2018

Tanzania: Interbank Cash Market to Determine Price of Money

THE interbank cash market is set to take a monetary centre stage as the economy migrates to interest-rate targeting next month. Under the new monetary framework, the price of money will dwell on interbank rates unlike current that the rates are benched using government securities--treasury bills or bonds.

The interbank is financial system of trading currencies among banks and financial institutions. The new system, to be introduced next month, will enable the central bank to regulate closely price stability in the economy. Orbit Securities, brokerage firm, said yesterday that financial markets are key players into facilitating the efficiency of interest rate policy framework.

"Indeed for this new framework to bear desired fruits, financial markets should play their key role... " it said in a weekly market synopsis. The key role, according to the brokerage firm, is resource allocation and information processing efficiencies. "This will be a key milestone in development of domestic financial markets." To make this new framework effective BoT is making necessary preparations to improve price discovery and reduce interest rate volatility.

Thus the interbank cash market rate will turned up to be the new price of money instrument and BoT will announce new interest rate whenever there is adjustment to either side. For instance, overnight interbank cash market interest rate declined to 2.95 per cent last December from 4.08 per cent recorded last June and 13.69 per cent in December 2016.

According to experts, that could have brought down loan interest rate as well though depending with the regulator calculations to determine extended broad money supply. However, the central bank has it that the introduction of the policy rate came at a time when money market infrastructures support the new initiative.

Fortnight ago, BoT Director of Economic Research and Policy, Mr Johnson Nyella said the bank will take actions in the interbank cash market to keep the interbank rate as close as possible to the policy rate. The Dar es Salaam Stock Exchange (DSE) sets to take the central position on facilitating the policy rate migration.


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