BANK of Tanzania (BoT) is set to adopt interest rate target policy that will change rules on controlling inflation and other macro indicators.
The central bank said the migration was now possible after stabilising and making overnight lending business more transparent among players.
BoT’s Mtwara Branch Economics Department Assistant Manager Aristedes Mrema said the main challenges were to stabilise Interbank Cash Market (IBCM) and financial inclusion.
“We managed to make the overnight lending market transparent and now players see the actual movement to determine demand and supply of funds,” Mr Mrema told participants of BoT Economic and Business Reporters’ seminar here.
The zonal economists said the other challenge that the policy rule was delayed to be implemented was limited financial inclusion which was believed to hold back information to filter to targeting groups.
“We hesitate to give out the exact date, but even we BoT, want the policy change like yesterday since reserve money system is not working properly for the economy,” he said.
Tanzania last year graduated to low-middle income status and due economic activities expansion the reserve money policy suits less the new status.
Mr Mrema said the central bank through its Monetary Policy Committee (MPC) will be reviewing the policy rate periodically using overnight lending rates.
“The policy rate will be derived from banks overnight interest rates...we want to also walk alongside EAC initiative which based on overnight rates” he said.
The rest of the EAC member states, minus Burundi and South Sudan, have replaced money velocity targeting policy with interest rate target policy.
The policy, according to BoT, target also to lower costs of borrowing since it will use overnight lending rate to influence cost of money.
“In the past, BoT tried a number of measures to reduce commercial banks loans interest rate but the rate, in most cases, refused to go down,” Mr Mrema said.
For instance, last year in a bid to contain the effect of coronavirus pandemic, the central bank reduced the Statutory Minimum Reserves (SMR) requirement to 6.0per cent, reduces its discount rate to 5.0per cent and reduced haircuts on government securities.
Since these measures were targeting money velocity, little effect of stimulating market on lending rates were observed especially on cutting commercial loans rates.