Country Report Tanzania May 2011

Outlook for 2011-12: Monetary policy

In recent years the main thrust of the monetary policy of the Bank of Tanzania (BoT, the central bank) has been to control the growth of broad money supply and credit growth to the private sector, in order to support economic growth and meet the inflation target. However, the situation is complicated by the high weighting of food in the inflation index and the volatility of money-supply growth and its lagged impact on the inflation rate. Indeed, with the pick-up in inflation in early 2011, the BoT may well struggle to meet its inflation target this year, although, given the steady pick-up in growth in private-sector credit in late 2010, it will have less concern about tightening policy than it has had in recent years. Nevertheless, a residual concern about the level of lending rates charged by commercial banks in the economy will persist. In recent years these rates have moved little regardless of what the central bank has done in terms of monetary policy. To this end, the BoT is expected to push ahead with what it terms its "second generation" of financial sector reform. However, to make a real impact the government will also need to implement difficult reforms, such as making it easier to use land as collateral.

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