Dar enjoys lowest CBR in region

TANZANIA: TANZANIA is enjoying the lowest central bank rate and inflation level against its peers in East African Community (EAC) region.

Analysts say local investors may be attracted by relatively high fixed income rates in neighbouring economies thus drain domestic and foreign funds, hence additional challenges to the exchange rate.

The country joined the regional band of central bank rates (CBR) late last month with 5.5 per cent in quarter one pegged on 7-days Interbank Cash Market rate.

The February inflation rate was 3.03 per cent. The Bank of Tanzania (BoT), Director of Economic Research and Policy, Dr Suleiman Misango, said interest rates tend to move in the same direction as inflation but with lags, because interest rates are the primary tool used by central banks to manage inflation.

“We cannot tame further the inflation it will discourage farmers and manufacturers to increase output…,”Dr Misango told ‘Daily News’ at the sideline of the 21st Conference of Financial Institutions (COFI) last that ended last Friday.

The Director said since the country migrates to CBR early last month entered the market to merely fine-tune the policy since the inflation is low.

Though, analysts said that the weighted average 7-days interbank rate has crossed above the current policy threshold of 7.5 per cent three times in the last thirty days, while the simple average of the rate during the period is 7.3 per cent. This indicates a mildly tight liquidity in the banking sector.

The BoT will review the policy rate later this month and announce the second quarter rate.

Nevertheless, central banks data showed that Rwanda is the second on the list of low rate at 7.5 per cent and Uganda 10 per cent. Kenya, the biggest economy in the bloc, is at 13 per cent.

“The highest central bank rate means the inflations are high on that countries and central banks are trying to cool them down” Dr Misango said adding: “The high policy rate pushes up commercial lending rates thus amplifying cost of money in the market…” Equity Bank Kenya recently, according to Dr Misango, notified borrowers that the lending rate will increase to 19 per cent from 15 per cent after Central Bank of Kenya (CBK) increase its policy rate to 13 per cent.

Rwanda inflation was 5.0 per cent in January down from 6.3 per cent last December, Kenya decreased to 6.3 per cent in February from 6.9 per cent in January while Uganda headline inflation rose to 3.4 per cent in February from 2.8 per cent.

Technically, monetary policy rate is set to control money supply with the primary objective of managing inflation. Tanzania is using less accommodative policy since mid-last year to control inflation after using expansionary policy to stimulate growth after Covid-19.

The Alpha Capital Head of Research and Financial Analytic, Mr Imani Muhingo, said Tanzania’s lowest policy rate is aligned with its low inflation, which is just behind Uganda in the region.

“Moreover,” Mr Muhingo said, “countries in the region are maintaining high policy rates to support domestic currencies, by curbing money supply which suppresses demand, including demand for imported goods.”

A low policy rate is good for economic growth as it lowers the cost of funds for investment and consumption, and ensures ample liquidity in the economy, especially when inflation is as stable as Tanzania’s. Mr Muhingo, moreover, said a low policy rate is good for the stock market from three fronts; firstly, high liquidity encourages consumption hence boosting corporate earnings.

Secondly, high liquidity encourages investments hence high market turnover. And thirdly, low policy rate means low cost of capital, which raises asset prices leading to a bullish stock market.

“On the other hand, low policy rate can be harmful to the exchange rate due to high liquidity which raises aggregate demand, including the demand for imported goods, especially in a developing country which is a net importer of consumer goods,” he said.

Also, Mr Muhingo warned that relatively high fixed income rates in neighbouring economies can drain domestic and foreign funds from our economy to fetch higher rates in other markets, hence additional challenges to the exchange rate.

Last Wednesday, Bank of Uganda increased CRB to 10 per cent from 9.5 per cent saying the depreciation of the shillings exchange rate triggered the need for a monetary policy to be tightened.

While, Kenya Central Bank early last month raised the CBR from 12.50 per cent to 13.00 per cent because overall inflation remained sticky in the upper bound of the target rang.

The Kenya’s Monetary Policy Committee will meet again next month. Rwanda’s central bank on last month held its key interest rate at 7.5 per cent, but might cut the rate at one of its upcoming meetings if inflation dynamics continued to look positive.

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