Has Tanzania reached the peak of interest rates?

DAR ES SALAAM: THE Bank of Tanzania (BoT) may be nearing the end of its monetary tightening phase, according to the recent macroeconomic forecast.

The forecast indicates that inflation will decline from an average of 3.7 per cent in 2026 to 3.5 per cent in 2027.

As a result, the policy rate is expected to remain at 6.25 per cent until the end of 2026 and then fall to 5.75 per cent in 2027.

Why? Inflation remains steady; recent drops in global energy prices have eased a significant source of imported inflation. The 50-basis-point rate hike on July 3, was notable historically and likely aimed at preemptively strengthening inflation control and stabilising the exchange rate.

Economic growth remains a key policy priority, financial conditions are generally supportive, and the global monetary policy environment is becoming less restrictive. These factors together indicate that maintaining the rate at 6.25 per cent for the rest of this year is appropriate. The rate hike is the first increase since April 2024.

And, this suggests that the BoT will start a gradual easing cycle in 2027, reducing the policy rate by 50bps to 5.75 per cent, driven by lower global oil prices, favourable base effects and contained inflation.

Nonetheless, robust economic growth and persistently tight bankingsector liquidity will restrict the potential for more aggressive monetary easing. Risks continue to favour a more hawkish policy stance.

If negotiations between the US and Iran do not reach an amicable solution following last week’s outbreak, with new US bombing of Iran and retaliation from Iran, oil and shipping costs are likely to remain elevated, leading to further tightening.

Additionally, adverse weather conditions associated with El Niño could disrupt agricultural output, leading to higher food prices.

Although the July hike aligned with my expectations, the rise exceeded what many analysts had expected. Consequently, close examination of data signals raised the year-end forecast from 6.00 per cent to 6.25 per cent.

In simple language for non-economists, the Monetary Policy Committee (MPC) explained that their decision aims to control inflation driven by higher costs of energy, fertiliser and transportation, which are linked to the US-Iran conflict.

Hence, it implies that the central bank will retain the current policy rate of 6.25 per cent at its October 7 meeting, as easing price pressures reduce the need for further tightening.

Headline inflation accelerated from 3.2 per cent y-o-y in March to 4.2 per cent in May, driven by accelerating price growth in the transport component of the CPI (4.2 per cent y-o-y in March to 11.9 per cent in May).

BoT and NBS’s own data, along with further trend analysis, signal that inflation will remain above 4.0 per cent in June and July, reflecting the lagged pass-through of higher global energy prices to domestic fuel costs.

However, Brent has fallen by 9.3 per cent since the US-Iran agreement was signed on June 17.

With global energy prices expected to continue declining through the second half of 2026, this suggests that overall inflation will drop to 3.5 per cent by year’s end.

Since this would place inflation near the lower end of the BoT’s between 3.0 and 5.0 per cent target range, the data analysis does not anticipate any further monetary tightening at the central bank’s final meeting of the year.

A calmer inflation environment is expected to allow for monetary easing in the coming year, indicating that inflation is projected to average 3.5 per cent in 2027, slightly lower than the 3.7 per cent seen in this year, according to data trend analysis.

A major factor in this disinflation is expected to be declining global oil prices, with Oil & Gas based on market data intelligence and analysis forecasting the average dated Brent price to be 71.0 US dollars per barrel in 2027, down from 84.0 US dollars in 2026.

Furthermore, advantageous base effects will contribute to keeping headline inflation lower than in the previous year.

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Although data analysis indicates that liquidity will improve in 2027, allowing some scope for monetary easing, the country’s banking sector overall is expected to remain characterised by relatively tight liquidity conditions.

This will limit the scope for an aggressive easing cycle. Hence, it is projected that Tanzania’s loan-to-deposit ratio will decline from 94.1 per cent at the end of 2026 to 93.1 per cent at the end of 2027, as loan growth slows while deposit growth continues to outpace lending.

From an economic and investment perspective, improved liquidity should reduce reliance on interbank borrowing, helping to keep the 7-day interbank rate, an important indicator for the BoT within the target band of 150 bps ± CBR.

However, the persistently high LDR suggests that money market rates are likely to remain relatively strong.

Combined with the BoT’s April 2026 decision to narrow the 7-day interbank rate target range to 200 bps ± CBR, data show that any easing cycle in 2027 will be slow and limited.

A robust growth outlook and supportive monetary policy will reduce the necessity for aggressive easing.

This suggests that real GDP will increase from 5.8 per cent in 2026 to 6.0 per cent in 2027, boosted by favorable base effects following the US-Iran conflict in 2026 and a strong infrastructure pipeline.

Despite sustained growth and low real interest rates projected to hit 2.3 per cent by end of 2027, data from BOT and NBS publications publicly available suggest that the BoT is unlikely to cut the policy rate below its pre-conflict level of 5.75 per cent.