Dar es Salaam. The Bank of Tanzania (BoT) has increased its central bank rate from 5.5 per cent to 6 per cent, which will apply from April to June 2024, the central bank announced on Thursday.
The decision, announced in BoT’s monetary policy statement, is the second policy statement released by BoT since it started implementing monetary policy using interest rates in January 2024.
In the statement, BoT says the decision to increase the interest rate is a cautionary measure to contain lingering inflation in the country as per the macroeconomic forecast it made in March 2024.
By raising interest rates, BoT makes it more expensive for banks to borrow money for lending. This means that less money will be available for individuals and businesses to borrow, or clients will have to borrow at a relatively higher cost from banks.
This in turn will mean less money will be available for spending hence gauging the rapid increase of the prices of goods and services due to decreased demand.
Some of the inflationary pressure points for Tanzania include the increase in the price of crude oil in the global market. Since June 2022, fuel prices in the country have reached the highest prices ever recorded. The second pressure point is food in prices which have been abundantly available due to adequate production.
In its February 2024 report, BoT showed that the shilling had recorded a much faster depreciation reaching 8.6 percent on an annual basis.
The depreciation of the shilling makes the country vulnerable to inflation, as the country spends a significant amount on goods importation. For example, sixteen per cent of importation in 2023 was for household items, while 20 per cent was spent on oil importation.
There is also the challenge of the dollar’s availability in the official markets, an issue that BoT has highlighted in the MPC and expects to fix. “Ongoing measures to increase the supply and reduce the demand for the US dollar are expected to stabilise the situation in the near future,” reads part of the MPC.
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In perspective, the rising interest rate is expected to curb inflation eventually; however, inflation in the country is not just a case of the money supply, as there are other external issues at play. This means that, with other factors maintained, inflation will remain moderate.
It is also worth noting that the new policy rate will be in effect until the end of June 2024, the end of the fiscal year.
This allows for close engagement between the government and BoT to ensure that plans for the new fiscal year 2024/25 take into account some of the external challenges facing the country.
