DAR ES SALAAM: TANZANIA is set to migrate from a reserve money policy to a short-term interest rates policy next month after over a decade of preparations.
As a result, the country will become a member of the group that uses this policy, which was first implemented by the Bank of New Zealand in 1990.
The Monetary Policy Committee (MPC), which met on Monday, has also approved this policy that aims to control inflation using interest rates.
According to the central bank statement, the MPC "noted with satisfaction the progress made by the Bank of Tanzania in adopting a new monetary policy frame- work in January 2024."
The new policy will focus on targeting short-term interest rates instead of reserve money to con- trol inflation and support economic growth.
According to experts, the rates are usually between 2 and 3 per cent. This new framework, known as the interest rate or price-based monetary policy framework, will allow the Bank of Tanzania to use all available information, not just one variable, to determine the best settings for monetary policy instruments.
Dr Hildebrand Shayo, an economist and invest- ment banker, believes that the central bank is migrating to a new policy because the old one is outdated and the country cannot operate in isolation.
"The effectiveness of the old policy may be compromised by the growth of the financial sector and its increasing integration with the regional and global economies," Dr Shayo told the 'Daily News'.
Furthermore, the new policy aligns with the harmonisation of monetary policies in the East African Community (EAC), where Rwanda, Uganda and Kenya already use this policy. The deadline for Tanzania to adopt it was in this fiscal year.
The Zan Securities Advisory and Research Manager, Isaac Lubeja stated that interest rates and credit channels are strong in the country, and innovations in short-term interest rates have a significant and faster impact on prices.
"This makes them effective instruments for monetary policy transmission, for example, to control inflation and achieve price stability," Mr Lubeja said.
He also mentioned that in the short-term, there won't be any immediate impact in the markets, but as the mar- ket continues to grow and deepen, changes in interest rates will affect the money market and adjust rates along the entire yield curve.
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Mr Lubeja added that equities will be repriced after a policy change due to changes in the discount factor and revised earnings expectations resulting from changes in financing costs and prospective sales.
The advantages of using inflation targeting include informing the public about the monetary policy position through a public announcement of the policy interest rate, while giving the Bank of Tanzania more flexibility to respond to macroeconomic shocks by adjusting the policy interest rate and short- term monetary policy.
Currently, the Bank of Tanzania is implementing a less accommodative monetary policy stance and using foreign exchange interventions, statutory minimum re- serve ratios (SMR), and other instruments to achieve its macroeconomic objectives.
Therefore, adopting an interest rate-based frame- work can potentially in- crease the effectiveness of monetary policy and provide the central bank with greater.
