Short-term rates up as banks adjust to BoT signals

DAR ES SALAAM: THE short-term interest rates showed slight adjustments this week, reflecting ongoing liquidity management by the Bank of Tanzania (BoT) amid cautious market sentiment.

Data from the interbank cash market (IBCM) indicates that the 7-day lending rate among commercial banks stood at 6.94 per cent on Tuesday, signalling moderate demand for short-term funds.

And, the central bank policy rate remains at 5.75 per cent for the third quarter of this year, guiding the overall lending and deposit rates in the market.

The Rediscount Rate stands at 8.25 per cent. Money market analysts note that this stable rate aims to balance economic growth with inflation control and reflects healthy, yet slightly tightened, liquidity conditions in the banking system.

Kadoo Securities Chief Executive Officer Justin Amos said the numbers offer a snapshot of the country’s current monetary policy stance and short-term liquidity conditions.

“The IBCM rate is above the CBR, indicating that there is some tightness in the interbank liquidity market,” Mr Amos told the ‘Daily News’ on Wednesday adding: “Banks are willing to pay more than the benchmark rate to access short-term funds, possibly due to increased demand for liquidity such as for end-of-month payments, tax obligations or seasonal activities like agricultural purchases.”

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He said the current spread of 1.19 points between the IBCM and CBR shows the BoT is allowing some upward pressure on market rates, but not yet intervening heavily, suggesting it’s watching liquidity carefully without yet signalling a shift toward tightening.

“In short,” Mr Amos said, “the market is under mild pressure but still operating within expected bounds.” These three rates, IBCM, CBR and Rediscount Rate, work together to shape liquidity conditions and signal the central bank’s monetary policy stance.

An economist and financial analyst Kelvin Msangi said research reveals that the country is operating under a corridor-based monetary policy framework, where the 5.75 per cent CBR acts as a reference signal rather than a strict peg for market rates.

“The 7-Day IBCM rate being above the CBR might look like a policy mismatch to a casual observer, but historically this has been the norm. “At the same time, by keeping the CBR below both the IBCM and the re-discount rate, the Bank of Tanzania maintains flexibility: It signals willingness to ease slightly, but ensures discipline by keeping central bank refinancing unattractive,” Mr Msangi said.

Since early last year, the IBCM has consistently traded above the CBR, reflecting how liquidity pressures and market risk premiums naturally push the interbank rate higher while still keeping it within the central bank’s intended corridor.

Mr Msangi said the rediscount rate of 8.25 per cent sets the ceiling of that corridor, discouraging banks from relying on the central bank as their main source of shortterm funding.

“The spread between the IBCM and CBR signals that liquidity in the banking system is relatively constrained, which translates into higher borrowing costs for businesses and households. “This helps restrain excess credit growth, control inflation and support shilling stability,” he said.

Zan Securities, Advisory and Research Manager Isaac Lubeja said since this policy adjustment, the IBCM rate has eased notably from averages of 7.95 to 8 per cent between January and June and declined further to around 6.9 per cent from July to date.

“This demonstrates the transmission of monetary policy into market liquidity conditions, as interbank borrowing costs are closely aligned to the policy benchmark,” Mr Lubeja said.

This change forms the basis for pricing across the broader financial system short-term deposit rates, lending rates and even government bond yields.

“In effect, by lowering the CBR, the Bank of Tanzania is deliberately guiding market yields downward, ensuring liquidity is well managed and supporting broader macroeconomic stability,” he said.

In short, the numbers illustrate a framework that prioritises stability through liquidity management, even if it means credit conditions stay somewhat tight.