What to expect from central bank rate for Q4

DAR ES SALAAM: THE Bank of Tanzania (BoT) is set to announce a new central bank rate (CBR) today, which will influence monetary policy through December.

The announcement comes as the BoT aims to address ongoing economic challenges and stabilise inflation, ensuring a favourable environment for growth. Analysts are closely monitoring whether there will be rate adjustment, as it will impact lending rates and overall financial conditions in the country.

Earlier this week, financial pundits were divided on the new central bank rate, with opinions varying on whether to increase, maintain, or slightly decrease the key rate.

Some experts believe the BoT will maintain its rate at 6.0 per cent for the third consecutive time, citing stable inflation and favourable macroeconomic conditions.

They argue that holding steady will help safeguard economic stability amid rising import costs and a persistent trade deficit. On the other hand, a significant faction points to the recent interest rate cuts by the Federal Reserve and similar moves in other regions, suggesting that a modest reduction could stimulate investment and support private sector credit growth.

ALSO READ: TZ GOLD TRADE: BoT offers global price

A financial analyst, Kelvin Msangi, said on Wednesday that the most likely outcome from the Monetary Policy Committee (MPC), is a 50 per cent probability, a small interest rate cut of up to 25 basis points. “A modest cut seems feasible,” Mr Msangi said, adding; “this would align with global trends, such as US Federal Reserve cuts and easing measures in South Africa and Kenya, aimed at stimulating investment without significantly raising inflation risks.”

According to Mr Msangi, the modest cut is attributed to stable inflation, which stood at 3.1 per cent in August and an increase in private sector credit, reaching 35.35 trillion shillings as of July.

Alternatively, the financial analyst said, there is a 40 per cent chance the MPC will hold rates steady at 6.0 per cent, prioritising economic stability amid a trade deficit of -1,557 million US dollars as of March and rising import costs.

Alpha Capital Head of Research and Financial Analytics, Imani Muhingo, said with inflation at the lower end of the target range and GDP within target, the elephant in the room is the availability of foreign exchange liquidity in the domestic market and the level of liquidity in the banking sector.

“Expectations are for the policy rate to remain at 6.0 per cent as the BoT injects liquidity through reverse repos. “Due to policy lag, it is still too early for the Bank of Tanzania to adopt a clear expansionary policy following the rate cut in the US.” “But also, it is unlikely for the central bank to raise the policy rate with tightening liquidity in the banking sector,” added Mr Muhingo.

The US just cut its policy rate by 50bps which is equivalent to adopting an expansionary policy and injecting the US dollar into the global economy.

ALSO READ: Tanzania to host African Youth AI, robotics competitions

The BoT had maintained a less accommodative macrofinance policy due to pending inflationary pressures from foreign exchange pressures.

Thus, increased foreign exchange availability in global markets gives the central bank room to adopt an accommodative policy, especially as liquidity in the banking sector tightens, evident from the loan-to-deposit ratio above 95 per cent and the 7-day interbank rate exceeding 8.0 per cent.

“We have seen that in the first long-term auction since the rate cut in the US and despite the weighted average yield to maturity slightly rising, the central bank pushed back against discounted dirty prices, presumably to control market psychology, while clean prices went to approximately 99/70,” he said.

The BoT’s MPC raised the CBR to 6.0 per cent in Q2, up from 5.5 percent in Q1, to mitigate the inflationary effects of exchange rate depreciation and safeguard economic growth.

Additionally, the rate was maintained at 6.0 per cent in Q3 as inflation remained within the BoT’s target range of 3.0–5.0 per cent and the economy continued its strong recovery path.

Vertex International Securities, Research and Analytics Manager, Beatus Mlingi said the Fed’s decision could also reduce Tanzania’s external borrowing costs, making it less expensive for the government and private sector to access international capital markets.

“Given this more favourable global environment, the BoT might feel less compelled to raise the [central bank rate] CBR to defend the shilling, as the currency depreciation risks are now lower,” Mr Mlingi said.

This shift in global financial conditions strengthens the case for maintaining the CBR at 6.0 per cent, as the immediate need to tighten monetary policy to stabilise the exchange rate has diminished.