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Bright times ahead as BoT  continues to ease money supply

Bright times ahead as BoT continues to ease money supply

THE Monetary Policy Committee (MPC) of the Bank of Tanzania (BOT) meets every after two months to deliberate and set the country’s monetary policy direction.

In its last meeting on 13th September, the committee reviewed the conduct of monetary policy and economic performance in the recent past and the general economic outlook.

The conduct of the monetary policy during the period aimed at keeping adequate liquidity with banks with the ultimate goal of increasing credit to the private sector as a catalyst of increasing investment and trade.

At its meeting, the Monetary Policy Committee of the Bank of Tanzania (BOT) unanimously decided to leave the current expansionary monetary policies through September and October which was in line with market expectations.

The decision to stand adamant on the current policy came against a backdrop of an improving growth outlook and relatively contained price pressures. Prospects for both the near term and for 2021 as a whole have seemingly improved amid more liquidity expansion, money supply growth and relative improved credit to the private sector.

Turning to inflation, although risks are skewed to the upside, largely due to higher fuel prices, price pressures are set to remain contained in the coming months, we have already seen interventions by the government in pricing controls as the price of fossil fuels across the globe continue to rise. Inflation is still contained around the Bank’s target range of 3.0 per cent –5.0per cent target band.

Fixed income market outlook Further decline in yields Looking ahead, continuous retainment of the current policy is in furtherance of the Bank of Tanzania’s effort to bolster Tanzania’s economic growth through the expansion of credit to the private sector. The MPC statement indicated that the Bank of Tanzania’s internal modelling suggests room for a further yield trimming in the near term as it looks to sustain liquidity easing policy in September and October.

The transmission of monetary policy action is often achieved through interest change. Bond yields are significantly affected by a monetary policy specifically, the course of interest rates.

A bond’s yield is based on the bond’s coupon payments divided by its market price ultimately as bond prices increase, bond yields fall. Falling interest rates make bond prices rise and bond yields fall.

Conversely, rising interest rates cause bond prices to fall, and bond yields to rise. Being a cost for borrowing and a reward for lending, the interest rate is an important economic variable that needs to be guided to achieve economic stability.

In a bid to ensure price and financial stability, the Bank of Tanzania Monetary Policy Committee (MPC) adopted measures early in July to reduce lending rates to control the movement of market interest rate ultimately reducing the interest rate spread.

Generally, a loose monetary policy tends to decrease interest rate which impacts the economy by decreasing the cost of borrowing and by so doing impacts the price of fixed income securities causing yields to fall as seen in the diagram below.

Outlook of the capital markets As monetary policy attempts to achieve a set of macro-economic objectives such as controlling inflation, increasing real output and creating employment, Broader financial markets for example the stock market, are quick to incorporate new information.

Therefore, a more direct and immediate effect of changes in the monetary policy instruments may be identified using financial data since changes in asset prices play a key role in several channels.

The low-yield environment consequential of the expansionary monetary policy will drive investors into the stock market in search of relatively higher yields. Where total returns of some stocks have been in double figures such as CRDB, TWIGA and DSE.

Stock market trading for the week ending 17th September has been lively with total turnover recorded for the week standing at 2.595bn/- which represents a 935.78per cent increase compared to last week’s turnover of 250.55m/-. The huge turnover is largely attributed to block trades by VODA and TBL trading a combined 2.21bn/-.

Average block share price VODA: 400/- Average block share price TBL: 4200/- Outlook Positive economic growth Expansive monetary policy by the Bank of Tanzania will accelerate economic growth and improve market liquidity, with credit to the private sector growing at 4.1% in July, we expect more liquidity in the market to reflect in the stock exchange as well.

We forecast the stock market growth in the near term as the market transitions to an economic expansion and a stronger focus on valuations. Low Treasury bond yields The yield curve, typically represented by the 20 years and the 2-year Treasury yield will continue to fall.

A steep yield curve in the Primary Treasury bond market often precedes a period of economic expansion. We will continue to see a low yield environment as the Bank of Tanzania continues to implement expansive monetary policy. We expect the central bank to remain cautious and Diligent about maintaining the expansionary policy.

A common characteristic that will be notable in the coming long tenure Treasury bond auctions is oversubscription however a fraction of the amount tendered will be collected by the Bank of Tanzania to trim down the yields.

Source: Zan Securities, a Capital Markets and Securities Authority licensed dealer and a member of the Dar es Stock Exchange

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Author: Zan Securities

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