BoT likely to maintain official rate at 6.0pc

DAR ES SALAAM: DEBT market analysts are predicting that the Bank of Tanzania (BoT) will leave the central bank rate (CBR) unchanged at 6.0 per cent on Thursday.

The central bank’s monetary policy committee will meet tomorrow to discuss the country’s money policy and announce a new CBR for quarter three the next day.

The first quarter rate was 5.5 per cent. Analysts have it that going by the current inflation rate of around 3.0 per cent, the environment supports a CBR to stimulate economic growth and maintain currency stability.

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However, some said the foreign exchange rate of around 2,600/- per US dollar, the major trading currency of the country, may trigger a minute upward tick.

“The committee members are likely to maintain the CBR at 6.0 per cent, with a 70 per cent chance based on May’s stable economic indicators,” Kelvin Msangi, an Operation Director at Tanzania Music Rights Society told Business Standard, “maintaining this rate supports economic stability and recovery.” He said an increase in the CBR has a 20 per cent chance of occurrence, considered if future inflationary pressures arise from external factors or fiscal policy changes, while a decrease is highly unlikely, with only a 10 per cent chance of being approved unless a significant economic downturn occurs.

Based on Mr Msangi analysis, the inflation was at 3.07 per cent and the Consumer Price Index (CPI) rose modestly to 116.18 in May from 115.51 April, indicating controlled inflationary pressures.

The April CBR was increased to 6.0 per cent reflecting March data where the inflation rate slightly rose to 3.02 per cent and the CPI increased to 115.51 from 113.

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“[The April] adjustment was a preemptive action to manage slight emerging inflationary pressures and ensure economic stability by moderating growth and enhancing the attractiveness of Tanzanian assets to foreign investors,” Mr Msangi said.

“The most probable action that will be announced on the 4th of July, by the MPC is to keep the CBR at 6.0 per cent, effectively balancing support for growth with control of inflation, according to the available data.”

However, some are divided between maintenance of the rate and an increase based on the monthly weighted average 7-day interbank rate that has consistently risen in the last three months from 7.08 per cent in April to 7.50 per cent in June.

“I am divided between a maintenance of 6.0 per cent and a 50bps increase,” Imani Muhingo, Head of Research and Financial Analytics at Alpha Capital, said.

He attributed his prediction to the fact that the country’s CBR is the lowest in the region which might lead to some realignment with regional peers, but also limiting the demand for foreign exchange which requires limiting growth of domestic money supply.

However, the 7-day interbank value of transactions in June was 43 per cent lower than May and 38 per cent lower than April.

“…This might mean ample liquidity in the banking sector, further advancing the reasons for a rate hike,” Mr Muhingo said.

Throughout the quarter two CBR has been in the upper half of the band, ranging between 6.5per cent and 8.0 per cent.

“Liquidity sufficiency at such rates may suggest that the CBR needs an upward adjustment,” he said.

The latest IMF’s recommendation emphasises the need for the BoT to better align the operational target with the policy rate and enhance the interest rate transmission channel to ensure monetary policy changes effectively influence broader economic conditions.

“This is crucial,” said Mr Muhingo, “particularly on the development of the money market and a yield curve which is essential in pricing fixed-income securities.”

Moreover, transparency and timely data publication are other areas that the BoT needs to enhance, especially regarding credit to the private sector, interest rates, fixed income auctions, and interbank activities.

“For instance, the central bank’s Monthly Economic Review has a time lag of one month, that could be improved,” he said. Vertex International Securities, Research and Analytics Manager Beatus Mlingi said the recent trends in the country’s capital market and the central bank’s actions support keeping the rate unchanged. “…It is anticipated that the BoT might maintain or increase the central bank rate for the third quarter,” Mr Mlingi said.

He said persistent or increasing inflation pressures might prompt the BoT to raise rates to curb inflation. “If the economy demonstrates robust growth, the central bank may raise rates to prevent overheating,” Mr Mlingi said, adding: “If global monetary policy trends, especially in major economies, could influence the BoT’s decision to either maintain or increase rates to keep the shilling competitive”.

The BoT’s proactive approach in adjusting the central bank rate and aligning operational targets will ensure that the country’s monetary policy remains effective in a dynamic global economic environment.

By addressing these challenges, the BoT can better support economic development and improve financial inclusion for all Tanzanians.

Dr Hilderbrand Shayo, an economist-cum-investment banker, said the economy is informed of changes in the official interest rate through four interrelated but distinct channels namely market rates, expectations, asset prices and exchange rates.

“A shift in the shortterm nominal interest rate brought about by policy has an immediate impact on the level of prices, which in turn influences output and employment,” Dr Shayo said.

The economist said It’s too soon to say whether or not the current CBR of 6.0 per cent has met the quarter two goal.

“Numerous things can determine how significant something is. A shift in monetary policy will particularly impact some economic agents regarding bank funding availability,” he said.