Q4 2024 CBR decision: Can BoT balance inflation, growth and global trends?

THE Bank of Tanzania (BoT) is preparing to announce a new Central Bank Rate (CBR) for the fourth quarter (Q4) of 2024, following recent shifts in both domestic and global economic conditions.

The BoT’s Monetary Policy Committee (MPC) had already increased the CBR to 6.0 per cent in Q2 2024, up from 5.5 per cent in Q1, to mitigate the pass-through effects of exchange rate depreciation on inflation and to safeguard economic growth.

This rate was maintained at 6.0 per cent in Q3 as inflation remained within the BoT’s target range of 3–5 per cent and the economy continued its strong recovery path.

As the MPC deliberates on the appropriate course of action for Q4, the decision to maintain, increase, or lower the CBR will be influenced by a combination of domestic economic factors, global financial trends and market expectations.

Inflation has remained within the BoT’s target band, with headline inflation for August 2024 recorded at 3.1 per cent, a slight rise from July’s 3.0 per cent.

According to the National Consumer Price Index (NCPI) press release for August, food prices have been a significant contributor to inflationary pressures, with the annual inflation rate for food and nonalcoholic beverages increasing to 2.8 per cent from 1.0 per cent in July.

However, core inflation, which excludes volatile items such as unprocessed food and energy, decreased marginally from 3.3 per cent to 3.2 per cent during the same period, indicating that underlying inflation remains stable.

Tanzania’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 Bank of Tanzania’s Monthly Economic Review for August 2024 reported a 5.6 per cent GDP growth rate for the first quarter, up from 5.0 per cent in the same period of 2023.

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.

The decision to maintain the CBR at 6.0 per cent in Q3 2024 was justified by the fact that inflation remained within target and the economy was on a strong growth path.

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.

A key global development that will influence the BoT’s decision is the Federal Reserve’s decision on September 18, 2024, 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.

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.

This could ease pressure on the Tanzanian shilling, which had depreciated earlier in the year due to higher US rates and global economic uncertainty.

The Federal Reserve’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 CBR to defend the shilling, as the currency depreciation risks are now lower.

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 rate cut, should the BoT prioritise stimulating domestic economic activity in response to the more accommodative global monetary stance.

Private sector credit growth in Tanzania has been robust but slightly below the levels seen in 2023.

The BoT’s Monthly Economic Review for August 2024 reported a 17.6 per cent growth rate in July, compared to 17.2 per cent in June, reflecting a strong demand for credit to fuel economic expansion.

However, this is lower than the 20.8 per cent growth recorded in the same period in 2023, suggesting that the pace of credit growth has moderated.

Interest rates on loans and deposits have remained stable, with the overall lending rate averaging 15.29 per cent in July 2024. 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.

Given the stable credit market conditions, the BoT may decide to maintain the CBR at its current level to continue supporting economic growth without encouraging excessive risk-taking or overheating the economy.

However, a cut in the CBR could potentially boost credit growth, especially if the BoT aims to further stimulate investment in key sectors such as construction and manufacturing.

In this context, as the BoT prepares to make its decision for Q4 2024, the MPC will need to carefully weigh based on the prevailing economic and financial conditions.

The decision to maintain the CBR at 6.0 per cent rests on the fact that inflation remains within the BoT’s target range and the economy is on a solid growth trajectory.

The BoT had already raised the CBR in Q2 2024 to mitigate the pass-through effects of exchange rate depreciation on inflation and this rate hike has helped stabilise the economy without stifling growth.

With inflation under control and GDP growth continuing at a strong pace, the current rate of 6.0 per cent is seen as providing an optimal balance between price stability and economic expansion.

Moreover, with the Federal Reserve now lowering its rates, the external pressure on Tanzania’s currency and borrowing costs has eased, reducing the urgency for further tightening.

While inflation is within target, there is always the risk that food and fuel prices could spike, especially given the recent rise in food prices.

A preemptive rate hike could be justified if the BoT wants to stay ahead of potential inflationary pressures, particularly if global commodity prices increase or if there are disruptions in agricultural production due to erratic weather patterns.

A rate hike would also help protect the shilling from any renewed depreciation pressures, ensuring that imported inflation remains contained.

If the BoT prioritises inflation control above all else, especially in the face of volatile global conditions, a rate hike could be justified to safeguard price stability.

On the other hand, lowering the CBR could be justified if the BoT decides to prioritise stimulating economic activity in response to the favourable global monetary conditions created by the Federal Reserve’s rate cut.

Lowering the CBR would reduce borrowing costs for businesses and consumers, potentially boosting investment and consumption, especially in sectors that have been slower to recover.

ALSO READ: BoT joins central banks to tackle inflation using AI

The global easing cycle provides Tanzania with the opportunity to support growth without immediately risking currency depreciation or inflation spikes.

A rate cut could also help accelerate credit growth, which has moderated compared to 2023, providing a further boost to the economy.

Therefore, the BoT’s decision on the CBR for Q4 2024 will depend on a careful assessment of both domestic and global economic conditions.

Maintaining the CBR at 6.0 per cent would be a prudent choice if the BoT aims to continue balancing inflation control with economic growth, especially given the stable inflation and strong GDP performance.

Raising the CBR could be justified if the BoT is concerned about rising inflationary pressures, particularly from food and fuel prices, or if there are renewed risks of currency depreciation.

Alternatively, lowering the CBR could be a strategic move to stimulate further economic activity, especially in light of the global monetary easing cycle and reduced external pressures.

Ultimately, the MPC’s decision will reflect the BoT’s broader policy framework, balancing the competing objectives of price stability, growth and financial stability