Analysts commend IBCM choice for interest rates policy shift

DAR ES SALAAM: THE choice of a seven-day interbank rate has been described as a commendable anchor towards migrating from reserve money to short-term interest rates to influence inflation.

The seven-day interbank overnight rate—Interbank Cash Market (IBCM)—is already perceived by commercial banks as the policy rates. The IBCM system provides a platform for lending and borrowing amongst banks.

Alpha Capital Head of Research and Analytics, Imani Muhingo, told ‘Daily News’ recently, the central bank’s choice of the seven-day interbank rate as an “anchor is commendable since banks already perceived the overnight IBCM rate” as the policy rate.

“Therefore,” he further said, “markets should expect a more efficient monetary policy implementation.”

The analyst said the interest rate target success in the region is evidenced in Uganda which has a relatively stronger monetary policy transmission in the East African Community (EAC) region as per IMF documents.

Simply put, the monetary policy framework transition means the central bank shifts from targeting aggregate reserve money supply to influence inflation, and begins using targeted short-term interest rates to gauge the monetary policy in pursuit in price stability and targeted inflation.

“There is numerous empirical evidence indicating the efficiency of interest rates targeting in the monetary policy transmission over aggregate reserve money targeting,” he said.

The evidence suggests that output and general prices react quicker and more effectively to interest rates than reserve money changes.

However, Mr Muhingo said, substantial transparency and clear and precise communication should be maintained by the central bank, for an effective transition and implementation.

“This is on top of the need to deepen and develop financial markets,” Mr Muhingo said.

The current monetary policy framework transition is in line with the harmonisation of EAC monetary policy frameworks, which had a deadline of the fiscal year 2023/24.

“But the preparations for the transition had already begun for a while [in the country],” Mr Muhingo said.

The preparations include the strengthening of the central bank’s modelling and forecasting capabilities, implementation of the Forecasting Policy and Analysis System (FPAS) and operationalisation of the Quarterly Projections Model and its integration into the policy-making process.

Last Monday, the Monetary Policy Committee (MPC), approved the progress made of the policy that aims to control inflation using interest rates.

Thus MPC “noted with satisfaction the progress made by the Bank of Tanzania in adopting a new monetary policy framework in January 2024.”

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 Zan Securities Advisory and Research Manager, Isaac Lubeja said 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 on the markets, but as the market continues to grow and deepen, changes in interest rates will affect the money market and adjust rates along the entire yield curve.

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 BoT more flexibility to respond to macroeconomic shocks by adjusting the policy interest rate and short-term monetary policy.

Currently, the BoT is implementing a less accommodative monetary policy stance and using foreign exchange interventions, statutory minimum reserve ratios (SMR), and other instruments to achieve its macroeconomic objectives.

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