BANK OF TANZANIA REVIEWS STATUTORY MINIMUM RESERVE (SMR) RATIO FOR BANKS

THE Bank of Tanzania (BoT) has reduced the statutory minimum reserves ratio on private deposits by 2.0 percentage points to 8.0 per cent, thanks to tight liquidity in the market.

The new minimum reserves ratio (SMR), according to the central bank, took effect at the end of last year. The rate was increased almost five years ago when the shilling fell to the lowest level ever as a means to control money in circulation.

BoT says in Monetary Policy Statement issued recently they lowered the amount from 10 per cent to 8.0 per cent given the developments in the market.

“This is expected to reduce the cost of capital on commercial banks and provide more liquidity to banks, which may enhance credit growth to the private sector in support of economic activity,” BoT says.

The relief on minimum reserves might have increased banks’ credit extended in January to all major economic activities as it experienced higher annual growth compared to the growth recorded in January 2014.

“Credit to transport and communication activity recorded the highest growth of 31.7 per cent in line with the continued strong performance in communication activity in the economy,” BoT says.

The central bank has it that it will further improve the effectiveness of the monetary policy operations in managing liquidity in line with the level of economic activity.

Also BoT says apart from the recent downward review of SMR on private deposits, the bank will unify the SMR account with clearing account that commercial banks maintain and allow partial reserve averaging before the end of April 2015.

“This measure is aimed at providing banks with adequate liquidity and avoid intermittent liquidity squeeze,” BoT says. In addition, BoT, will finalise a study on the relationship between banks’ excess reserves and overnight interest rates which will provide analytical ground for targeting a smoother path of excess reserves.

The idea, according to central bank, is to reduce interest rate volatility in interbank cash market and enhance monetary policy transmission mechanism.

These initiatives are consistent with gradual move towards a price based monetary policy framework and harmonisation of monetary policy operations within the East African Community.

Daily News