It's amazing but it's true

Kwaroz · 2012-01-02T09:41:09+00:00

We have been observing an increasing trend in the Tbills interest rates for the past 6 months. This has been caused by official mechanism adopted by the Central Bank of Tanzania to create price stability. The Central Bank therefore, has the responsibility of ensuring that it establishes monetary conditions that are consistent with low and stable inflation. The Central Bank controls inflation by controlling the growth of money supply. The Bank of Tanzania targets broad money, M2, which is defined as currency in circulation outside banks, and total deposits held by commercial banks, excluding foreign currency deposits. M2 is chosen because it is the monetary aggregate that is estimated to have closest relationship with the rate of inflation. Open market operations target a specific short term interest rate in the debt markets. This target is changed periodically to achieve and maintain an inflation rate within a target range.The bank of Tanzania uses Open Market Operations (OMO) to control inflation. This involve buying and selling of government bonds/Tbills on the open market. It is either contraction or expansion of money supply. It is the primary means of implementing monetary policy by a central bank. The usual aim of Open Market Operations is to control the short term interest rate and the supply of base money in an economy, and thus indirectly control the total money supply. Monetary targets such as inflation, interest rates or exchange rates are used to guide this implementation. We have observed a significant increase in the Tbills interest rate due to the implementation of the monetary policy. The government is trying to reduce the broad money supply (M2) in circulation by attracting money suppliers to invest in governments risk free financial instruments. Worse still, the government is struggling to fund its recurrent expenditure through commercial borrowings. All these have contributed to the current liquidity crisis in the market. The last and current BOT auctions show the following interest rates; Current auction ·91 days 5.52% to 10.16% ·182 days 6.77% to 12.30% ·364 days 9.87% to 13.44%If you look at the current interest rates above you will notice a geometric increase in the interest rates. This has a significant impact on the pricing of deposits (increase in interest expense). For example if you are borrowing money today for 6 months tenor, you are likely to pay 12.30% p.a. Now, at what margin above the cost of funds the financial institution going to price loans? I have shared this with you so that you have a feel of the current liquidity situation. Thanking you in advance.

Thread starter Kwaroz
Start date Jan 2, 2012

Kwaroz

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It's amazing but it's true

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