Monetary Policy Rate Pass-through to Retail Bank Interest Rates in Tanzania

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This study employs an error correction model to assess the degree and speed of adjustment of commercial banks’ interest rates to monetary policy rate changes with a view to providing insight into the pass-through of the monetary policy rate to the interbank rate and retail bank interest rates in Tanzania. The analysis started with the assessment of long run and causal relationships between interest rates. In error correction model setting and by using monthly data spanning the period March 2003 through December 2012, estimations for the retail lending rate and deposits rate models provided baseline results to help test the maintained hypotheses. Separate estimations were made for the three largest banks and “small” banks to account for concentration effects on the interest rate pass-through. In addition, distinction was made, on one hand, between banks owned privately and publicly, and foreign against domestically owed banks on the other.