BOT to Add Interest Rate to Monetary Policy Instruments

The Bank of Tanzania (BOT) will add interest rates to its monetary policy instruments by the end of 2016.

The announcement was made by Johnson Nyela, Economic Research and Policy Director at BOT, on September 14th 2016.

Nyela indicates that BOT is in the final stages of the process of adopting interest rates as an instrument for conducting monetary policy.

The use of interest rates as monetary policy instrument involves altering base interest rates, which ultimately determine all other interest rates in the economy. The base rate is the interest rate at which the Central Bank lends money to commercial banks.

Currently (2016), the BOT monetary policy instruments include Open Market Operations (OMO) for government securities, as well as purchase of foreign currency and minimum reserve requirements.

Through OMO, BOT buys and sells government securities in the open market to expand or contract the amount of money in the banking system.

BOT 2016–2017 Monetary Policy Targets

BOT’s 2016–2017 monetary policy targets include 20.5% annual growth of private sector credit, up to 14.8% annual growth of M3 (broad money supply), up to 13% annual growth of average reserve money, and maintaining adequate levels of gross official reserves.

Gross official reserves include BOT’s holdings of external assets, available to the Bank for direct financing of balance of payments.

BOT’s 2016–2017 monetary policy also aims at keeping inflation close to 5%. August 2016 inflation decreased to 4.9%.