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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