BoT urged to improve interbank cash market functioning

TANZANIA: THE International Monetary Fund (IMF) has said the Bank of Tanzania should improve the functioning of the interbank cash market and standing facilities to ensure that the target interbank rate remains close to the policy rate.

Following the launch of the new monetary policy framework, the BoT injected liquidity through reverse repo to alleviate temporary cash shortages which caused a few small banks to borrow unsecured in the interbank cash market at relatively high rates, pushing the 7-day interbank market rate to the upper band of the corridor.

The BoT should ensure that liquidity conditions are consistent with aligning the 7-day interbank rate with the Central Bank Rate and continue to improve the functioning of the interbank cash market through ongoing technical support from Front clear.

The BoT should also ensure that banks have access to a sufficient supply of collateral to use the intraday Lombard facility when needed.

While the +/- 200bp corridor between CBR and the target rate is appropriate during the introductory phase of the new framework, the corridor needs to narrow over time.

The BoT launched new interest rate based monetary policy framework in January, initially setting the Central Bank Rate (CBR) at 5.5 per cent.

The Monetary Policy Committee (MPC) increased the CBR to 6 per cent in April, adopting a moderately tight stance in response to increases in core inflation and complementing efforts to ease pressures in the FX market.

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Interest rates in the interbank and Treasury bill markets rose over the past year, reflecting lagged effects of liquidity withdrawal and the tighter monetary policy stance.

The BoT has been largely successful in keeping the 7-day interbank rate within 200bp of the CBR, in accordance with the new framework.

However, the 7-day rate has occasionally exceeded CBR+200bp due to temporary cash shortages in a few small banks.

Partly in response to pressures in the cash market, the BoT allowed reserve money growth to rise, reversing the significant growth decline in 2023.