Finance Brief Note
February 2018
Interest Rate Based Monitory Policy Framework
In this industry update, we provide clarification on
the Bank of Tanzania's (the BOT) adoption of the
interest rate based monetary policy framework
2017/2018 (the Policy Framework). Contrary to
popular belief, the Policy Framework does not
place caps on interest rates. In a document dated
18 December 2017 published on the BOT website,
the BOT clarified that the Policy Framework targets
interbank cash market rates which is the rate at
which banks lend money to each other.
The BOT's central role is to ensure stability of
prices which is done by:
i. monitoring CPI Basket which focuses on
inflation;
ii. monitoring prices which focuses on interest
rates; and
iii. monitoring foreign currency which focuses
on exchange rates.
The Policy Framework outlines the BOT's decision
to either increase or decrease the flow of money
into the country. The Policy Framework published
on 17 June 2017 indicates the BOT's decision to
move from providing quantitative based policy
frameworks to providing price based policy
frameworks. This means that instead of providing
targets that speak of increments/decrements in
Tanzanian shillings (i.e. in relation to the average
quantity of reserve money), the BOT will indicate
an increase or decrease using the per cent interest
rate. In essence, the language used by the BOT
has changed.
The BOT sees this change from quantitative
targets to interest rate targets as beneficial to the
market as it is less technical to calculate and
therefore easier for the public to better understand
the Policy Framework.
It has also been indicated that the introduction of the
Policy Framework will increase competition in
commercial banks by ensuring that the commercial
banks' interbank lending rate is in line with policy
rates provided by the BOT. It is expected that this will
also provide investors and borrowers a base to
bargain from as they will be aware of the interest rate
at which the commercial banks are borrowing from
the BOT and therefore can negotiate better interest
rates. Furthermore, the BOT believes that this will
also reduce interest rate volatility.
The Policy Framework has been used widely across
East Africa and the developed world. Its adoption in
Tanzania is in part due to the broader commitment to
modernise the monetary policy framework and
harmonise the monetary policy practices across the
East African Community. It is crucial that the Policy
Framework is not confused with interest rates
capping which is a mandatory requirement that puts a
ceiling on interest rates commercial banks may
demand.
It is interesting to note that interest rates capping was
implemented in Kenya in 2016 and has caused
interference to the functioning of the market and
adverse effects to the economy to such a large extent
that the Central Bank of Kenya is considering
repealing the law that put the cap into effect.
We hope this information has been useful. Should
you require further information, please do not hesitate
to contact us.
Contact us
Tenda Msinjili
Senior Associate
Direct Dial: + 255 76 898 3016
Tenda.Msinjili@clydeco.com
Michaela Marandu
Senior Associate
Direct Dial +255 76 898 3024
Michaela.Manandu@clydeco.com
Amreen Ayub
Associate
Direct Dial +255 76 898 3032
Amreen.Ayub@clydeco.com
Clyde & Co Tanzania
th
11 Floor, Golden Jubilee Towers
Ohio Street, P.O. Box 80512
Dar es Salaam. Tanzania