Bank of Tanzania (BoT) has no intention of capping interest rate on loans rather than shifting from reserve money to interest rate target policy. The bank said yesterday that interest rate on lending will continue to be determined by the market forces based on interbank cash market rate.
The BoT Deputy Governor Financial Stability and Deepening, Dr Bernard Kibesse, said the change of policy staged to start next March. “The interest rate to be targeted in the new framework will be the interbank cash market rate, which is the rate at which banks lend to each other.
“Under the new framework the BoT will set and announce a policy rate and take actions in the interbank cash market to keep the interbank cash market rate as close as possible to the policy rate,” Dr Kibesse said yesterday.
The central bank issue the clarification following a story on Monday that said BoT set to introduced a policy on interest rate capping by March next year. “Interest rate based monetary policy framework should not be confused with interest rate capping, which constitutes a mandatory requirement that interest rates should not exceed a certain limit,” Dr Kibesse said.
The Deputy Governor said interest rate capping interferes with the functioning of the market leading to inefficient allocation of resources and “BoT does not intend to do so”. Instead, Dr Kibesse said, all policy actions will be taken in the market to keep the interbank cash market rate close to policy rate.
“Interest rate based framework is a best practice across the world,” he said. The policy adoption by the central bank was part of the monetary policy modernization process currently being implemented. BoT said after a thorough research and work wants to replace the current monetary policy framework which targets monetary aggregate reserve money, with a new framework that targets interest rate.
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