Analysts split on upcoming central bank rate decision

AS the Bank of Tanzania (BoT) approaches a key interest rate announcement on Thursday, analysts are sharply divided on the likely outcome.

Some experts believe the BoT will maintain its rate at 6.0 per cent for the third consecutive meeting, citing stable inflation and favourable macroeconomic conditions.

They argue that holding steady will help safeguard economic stability amid rising import costs and a persistent trade deficit.

On the other hand, a significant faction points to the recent interest rate cuts by the Federal Reserve and similar moves in other regions, suggesting that a modest reduction could stimulate investment and support private sector credit growth.

A Financial Analyst, Kelvin Msangi, told Business Standard yesterday that the most likely outcome forms the Monetary Policy Committee, is a 50 per cent probability, is a small interest rate cut of up to 25 basis points.

“A modest cut seems feasible,” Mr Msangi urged saying “this would align with global trends, such as US Federal Reserve cuts and easing measures in South Africa and Kenya, aimed at stimulating investment without significantly raising inflation risks”.

The modest cut, according to Mr Msangi, based on the fact that the inflation is stable at 3.1 per cent in August and private sector credit rising to 35.355tri/- a year-to-July.

Alternatively, the financial analyst said, there is a 40 per cent chance the MPC will hold rates steady at 6.0 per cent, prioritising economic stability amid a trade deficit of -1,557 million US dollars as of March and rising import costs.

A moderate tightening has a 10 per cent likelihood, which may occur if inflationary pressures, such as food inflation at 2.8 per cent as of August, increase sharply.

“In this case, the MPC could introduce a small rate hike to curb inflation and protect the shilling,” he said.

Alpha Capital Head of Research and Financial Analytics, Imani Muhingo, said with inflation at the lower end of the target range and GDP within target, the elephant in the room is the availability of foreign exchange liquidity in the domestic market and the level of liquidity in the banking sector.

“Expectations are for the policy rate to remain at 6.0 per cent as the Bank of Tanzania injects liquidity through reverse repos.

“Due to policy lag, it is still early for the Bank of Tanzania to move with a clear expansionary policy out the rate cut in the US.

“But also, it is unlikely for the central bank to raise the policy rate with tightening liquidity in the banking sector,” Mr Muhingo told Business Standard over the weekend.

The US just cut its policy rate by 50bps which is equivalent to adopting an expansionary policy and injecting the US dollar into the global economy.

“This relieves the foreign exchange pressures in financial markets, particularly in developing economies such as Tanzania,” Mr Muhingo, who is an economist, said.

The BoT had maintained a less accommodative due to pending inflationary pressures from foreign exchange pressures.

Thus, increased foreign exchange availability in global markets gives the central bank room to adopt an accommodative policy, especially as liquidity in the banking sector tightens, evident from the loan-to-deposit ratio above 95 per cent and the 7-day interbank rate exceeding 8.0 per cent.

“We have seen that in the first long term auction since the rate cut in the US and despite the weighted average yield to maturity slightly rising, the central bank pushed back against discounted dirty prices, presumably to control market psychology, while clean prices went to approximately 99/70,” he said.

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The BoT’s MPC raised the CBR to 6.0 per cent in Q2, up from 5.5 per cent in Q1, to mitigate the inflationary effects of exchange rate depreciation and safeguard economic growth.

Additionally, the rate was maintained at 6.0 per cent in Q3 as inflation remained within the BoT’s target range of 3.0–5.0 per cent and the economy continued its strong recovery path.

Vertex International Securities, Research and Analytics Manager, Beatus Mlingi said the Fed’s decision could also reduce Tanzania’s external borrowing costs, making it less expensive for the government and private sector to access international capital markets.

“Given this more favourable global environment, the BoT might feel less compelled to raise the [central bank rate] CBR to defend the shilling, as the currency depreciation risks are now lower,” Mr Mlingi said.

This shift in global financial conditions strengthens the case for maintaining the CBR at 6.0 per cent, as the immediate need to tighten monetary policy to stabilise the exchange rate has diminished.

“It also opens the door to a potential stimulating domestic economic activity in response to the more accommodative global monetary stance,” he said.

The country’s strong GDP growth trajectory, particularly in sectors such as construction, agriculture, and financial services, supports the argument for maintaining or even lowering the CBR.

The central bank’s Monthly Economic Review for August reported a 5.6 per cent GDP growth rate for the first quarter, up from 5.0 per cent in the same period last year.

The economy is projected to grow by 5.4 per cent for the year, driven by both public and private investments as well as robust performance in key sectors.

This economic strength has allowed the BoT to adopt a cautiously accommodative stance in recent quarters.

“As the MPC deliberates on the Q4 CBR, they will weigh the moderate inflationary pressures against the need to support continued economic growth, ensuring that any policy adjustments do not stifle the recovery,” Mr Mlingi said.

A key global development that will influence the BoT’s decision is the Federal Reserve’s decision fortnight ago to lower its federal funds rate target range from 5.25 per cent–5.5 per cent to 4.75 per cent–5.0 per cent.

South Africa’s Reserve Bank (SARB), the largest central bank by nominal GDP in Sub-Saharan Africa, late last month cut its key interest rate by 25 basis points to 8 per cent, marking its first-rate reduction since the pandemic.

The Central Bank of Egypt, the second largest by nominal GDP in Sub-Saharan Africa, held its interest rate steady at 27.25 per cent for the third consecutive meeting as headline inflation eased to 25.7 per cent in July.

Also, the Central Bank of Nigeria, the region’s fourth-largest economy, raised its benchmark interest rate by 50 basis points to 27.25 per cent, marking its fifth consecutive hike in this year to combat inflation and stabilise the naira.

Meanwhile, the National Bank of Morocco, with the sixth largest GDP in the region, kept its benchmark rate unchanged at 2.75 per cent in last month following a rate cut in June, citing moderated inflation.

While, the Central Bank of Kenya, the seventh-largest economy, lowered its benchmark rate to 12.75 per cent in August after maintaining it at its highest level since 2012, benefiting from an improved global outlook.

Similarly, Rwanda responded to stable inflation projections of around 5.0 per cent by cutting its key rate twice in 2024, from 7.0 per cent in May to 6.5 per cent in August.

Ghana followed suit, reducing its rate by 200 basis points to 27 per cent in September after inflation eased to 20.4 per cent, though still above its target.

Meanwhile, Uganda also adjusted its policy, lowering its rate by 25 basis points to 10 per cent in August, despite inflation rising slightly to 4.0 per cent, yet remaining below its 5.0 per cent target.

Mr Mlingi said this unexpected cut shifts the global monetary landscape and creates favourable conditions for emerging markets like Tanzania.

Lower US interest rates tend to reduce capital outflows from emerging markets, as the yield differential between US assets and local assets narrows.

Interest rates on loans and deposits have remained stable, with the overall lending rate averaging 15.29 per cent in July.

Deposit rates increased marginally, with the one-year deposit rate edging up to 9.96 per cent.

“This stability in the financial system indicates that there is no immediate pressure on the BoT to adjust the CBR drastically.

The current rate is supporting economic activity without triggering excessive inflationary pressures or financial instability,” he said.