Overnight lending down after BOT slashes discount rate

THE Bank of Tanzania (BoT) move to slash discount rate by 4.0 per cent has helped to cut down interbank interest rate and amount for overnight borrowing.


On Monday, the interbank money market observed a decrease of 13 basis point while total volume exchanged amongst bank decreased four times to 3.4bn/-. This signified that banks have turned to the lender of last resort for funds instead of borrowing among themselves at high relative interest rate.

CRDB Bank’s Daily Market Highlights said liquidity in the interbank money market eased up once more as observed by a decrease of 13 basis points to 7.35 per cent at the end of the session. This is lowest rate in a week.

“The total volume exchanged amongst banks decreased to 3.4 billion; four times less the amount traded on Friday,” the CRDB report said yesterday. BoT Deputy Governor, Dr Natu Mwamba late last week wrote to banks notifying them on discount rate cut to 12 per cent from 16 per cent with effect from last Monday. The amount was the first cut in the last four years and geared towards sustaining price stability in the market that faces tight liquidity.

“The discount rate, which is applicable to banks borrowing from Bank of Tanzania as a lender last resort, will also be used to discount the Treasury Securities,” Dr Mwamba said. National Microfinance Bank (NMB) said the Central Bank measure would help to spur lending and boost economic growth, the first time it has lowered borrowing costs since 2013.

Tight liquidity came after the economy experienced a low foreign budgetary inflows compared with historical performance.

“These developments together with the transfer of public institutions’ deposits to the Bank of Tanzania contributed to liquidity tightness in the banking system…” BoT said in January Monetary Policy Statement. Nevertheless, despite BoT’s policy actions taken to inject liquidity, average reserve money remained below the targeted path.

The tight liquidity situation, particularly in the first three months of 2016/17, was also mirrored in the general rise of the rate at which commercial banks lend cash to each other overnight to an average of about 16.15 per cent last September from 12.76 percent last June.