Banks should now lower interest rates on loans
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INTEREST rate in Tanzania has been lowered again in what is expected to reduce borrowing costs and boost lending to the private sector which will eventually stimulate economic activities and, by extension, growth.

The Central Bank announced to reduce its discount rate by three per cent that is from 12 per cent to nine per cent, to make borrowing more affordable for member banks. The cut, announced in a circular to commercial banks over the weekend, came into effect from Monday.

This is the second time the Central Bank comes up with a major policy stance to prop up lending to the private sector which dropped to historical low levels last year. In March this year, the Central Bank of Tanzania slashed the discount rate by 4 per cent that is from 16 per cent to 12 per cent.

It was the first time it has lowered borrowing costs since 2013. It then asked commercial banks to consider lowering their lending rates to help spark credit growth.

Credit to the private sector grew by only 7.2 per cent last year down from 24.8 per cent in the previous year associated with the bank’s elevated caution in lending due to soaring non-performing loans.

Interest rate cut is always viewed as a measure to stimulate growth by encouraging banks to lend rather than invest in Treasuries and government bonds. In Tanzania, interest rates decisions are taken by the Bank of Tanzania.

The Bank of Tanzania official interest rate is the discounted rate. We view the Central Bank has taken as a bold measure to shore up short-term liquidity needs for the borrowing financial institution, and we, therefore, expect that since the rate cut will help banks to borrow from the Central Bank at less expensive rate, these banks will also make lending more affordable by cutting interest rates.

This will promote loans to the private sector which in turn will stimulate economic activities and hence boost growth.

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