This refers to the processes through which monetary policy actions affect the economy and domestic inflation in particular. The Transmission of monetary policy actions to the economy takes months to have their full effect on domestic prices. For this reason, monetary policy is generally forward looking where policy decisions are largely based on where the economy might be in future, other than what it is today.

The Monetary Policy Committee (MPC) of the Board of Directors of the Bank is responsible for setting the policy rate (CBR) on a quarterly basis, consistent with the broader macroeconomic policy objectives of the Governments stipulated in the Monetary Policy Statement. At the beginning of every fiscal year, the Bank of Tanzania indicates the direction/stance of monetary policy in its Monetary Policy Statement in accordance with the broader macroeconomic policy objectives of the Governments. The Monetary Policy Statement is approved by the Board of Directors of the Bank of Tanzania and submitted to the Parliament through the Minister responsible for finance.

Policy co-ordination is given strong emphasis at the Bank of Tanzania because of the strong influence that fiscal policy has on monetary policy. The various monetary policy committees have been so structured that they take into consideration this important aspect. Apart from the MPC meeting, there is also a joint committee on government expenditure projections and monitoring. The joint committee meets once a month, projects the resource envelop for the month and prioritizes expenditure in terms of the available resources. The Permanent Secretary in the Ministry of Planning and Finance chairs the committee. It has several members including members from Bank of Tanzania.

In some cases, headline inflation is affected by supply side shocks and developments in global commodity prices that are beyond the influence of monetary policy. Further, it is widely agreed that, expansionary monetary policy influences growth of output only in the short run due to perceived rigidity of prices. However, in long run expansionary policies will lead to higher prices other than higher output growth as price rigidities diminish.