The Bank of Tanzania (BoT) has said it will undertake reforms to improve the functioning of the interbank market as part of enhancing monetary policy operations.

According to Monetary Policy Statement (MPS) for February published last week, the reforms include a review of the collateral management framework, pricing of the Lombard loan facility and monetary policy instruments, as well as a review of the regulatory framework to facilitate the distribution of liquidity among banks. 

The BoT will also undertake reforms to improve the effectiveness of monetary policy by increasing awareness among stakeholders on the interest rate-based monetary policy framework and the need to use the shilling for domestic transactions.

The statement says the monetary policy stance for the second half of 2024/25 ending June, will remain relatively the same as in the first half of the year with the aim to stabilize inflation around 3 percent and foster economic growth to around 6 percent. 

The central bank says it will continue to maintain adequate liquidity in the economy using monetary policy instruments at its disposal in aligning the 7-day interbank interest rate with the CBR.

During the first half of 2024/25, the Monetary Policy Committee (MPC) maintained the Central Bank Rate (CBR) at 6 percent, to contain the pass-through effect of exchange rate depreciation on inflation while facilitating economic growth. 

The MPC decision was taken after considering the global and domestic economic conditions and associated risks. 

To ensure an appropriate level of liquidity in the economy, monetary policy operations focused on keeping the 7-day interbank rate within the band of +/- 2 percentage points of the CBR.

The MPS says the implementation of monetary policy was satisfactory as liquidity in the economy was aligned with economic conditions, inflation expectations were anchored well below the medium-term target of 5 percent, and private-sector credit growth remained high, supporting the growth of the economy. 

According to the statement, the implementation of monetary policy also complemented supply-side factors in reducing pressures on the exchange rate, eliminating the parallel foreign exchange market, leading to a decline in dollarization, and reducing speculation on the exchange rate. 

However, the 7-day interbank rate was generally stable, increasing slightly above the upper band of the CBR in August, September and October 2024, and thereafter, moving within the target band. 

The increase was due to a bumper harvest of crops, particularly cashew nuts, tobacco and cereals, which led to more than projected demand for currency, as well as an increase in commercial banks holdings of foreign currency and investment in government securities by non-bank investors. 

To reduce the 7-day interbank rate to the CBR corridor, the BoT injected liquidity using reverse repo operations, purchase of foreign exchange, and conducted foreign exchange swaps with banks. 

In addition, the BoT increased liquidity in the economy by purchasing gold from the domestic market through its Gold Purchase Program2. 

Following these measures, liquidity in the economy improved, as the 7-day interbank rate declined and hovered within the CBR corridor, and clearing balances of banks (banks reserves) also increased.

The implementation of monetary policy enabled the attainment of targets of net domestic assets (NDA) and net international reserves (NIR) of the Bank, set forth in the Extended Credit Facility (ECF) program3 

BoT says, looking forward, the interest rates will continue to be market determined. 

The Monetary Policy Committee says will continue setting the CBR to influence the determination of interest rates in the interbank market. 

“The Bank will continue undertaking reforms in the financial sector to complement Government efforts in ensuring the appropriate determination of interest rates,” the statement says 

“In implementing the reforms, the BoT will continue engaging stakeholders in the financial sector to ensure consumer protection, increased financial literacy, and improved financial inclusion. The exchange rate will also remain to be market-determined.”

According to BoT, the exchange rate will remain flexible to limit the impact of external shocks on the economy and improve market efficiency. 

Participation of the BoT in the interbank foreign exchange market will be in accordance with the Foreign Exchange Intervention Policy. 

In addition, the central bank says will continue to maintain adequate foreign reserves as a buffer against external shocks and ensure that banks adhere to market norms as enshrined in the IFEM Code of Conduct.