Monetary policy consists of decisions and actions taken by the Bank of Tanzania to ensure that the supply of money in the economy is consistent with growth and price objectives set by the government. The Monetary Policy Committee (MPC) of the Board of Governors of the Bank which is chaired by the Governor is responsible for setting the monetary policy direction bi-monthly, inline with the targets set in the Monetary Policy Statement.
MONETARY POLICY FRAMEWORK
The monetary policy framework of the Bank of Tanzania focuses on maintaining domestic price stability by targeting growth rate of money supply. The mainstays of the monetary policy framework are as follows:
Objective of the Monetary Policy
The primary objective of the monetary policy is to maintain price stability, which is defined as low and stable inflation rate over time. The medium-term target is set at 5 percent. This target is consistent with EAC and SADC convergence criteria of 8 percent (set as maximum) and 3 - 7.0 percent, respectively. The inflation target is considered appropriate to support a sustainable growth of the economy. To achieve the objective of monetary policy, the Bank focuses on maintaining adequate level of liquidity in the economy and ensuring stability of interest rates and exchange rate.
The Bank of Tanzania controls inflation by managing the growth of money supply. Extended broad money supply (M3), which is estimated to have the closest relationship with the rate of inflation, is used as an intermediate target variable. M3 comprises of currency in circulation outside the banking system and deposits of residents with banks, including foreign currency deposits.
In order to influence growth of M3, the Bank of Tanzania controls growth of reserve money, elsewhere referred to as base money or high-powered money. Reserve money is related to money supply through the money multiplier. It basically comprises currency in circulation outside the banking system, cash held in the vaults of banks and deposits of banks kept with the Bank of Tanzania in local currency.
Monetary Policy Instruments
The Bank of Tanzania utilizes a variety of market-based instruments to conduct monetary policy. The monetary policy instruments include open market operations, i.e., selling or buying debt securities, and sale and purchase of foreign currency in the inter-bank foreign exchange market. In addition, repurchase agreements (repo) and reverse repurchase agreements (reverse repo) are used. The statutory minimum reserve requirement ratio (SMR) and discount rate are also part of monetary policy instruments. There are also standby credit facilities—intraday and Lombard loan facilities.
The Bank of Tanzania exercises a high degree of transparency on its decisions. The decisions of the Monetary Policy Committee (MPC) are communicated to banks through post-MPC engagements with Chief Executive Officers of banks, and to the public through the media. In addition, the Bank publishes various periodic reports, which highlight monetary policy stance, the outcome of monetary policy implementation, and developments of the economy at large. The reports are available on the Bank of Tanzania website.