Monetary policy and cost-push inflation dynamics in Tanzania

Cost-push inflation, driven by rising production costs such as energy prices, poses a persistent challenge to macroeconomic stability in Tanzania. External shocks and domestic structural inefficiencies intensify this issue. While monetary policy remains a key tool for controlling inflation, its effectiveness in managing cost-push inflation within the Tanzanian context has not been fully examined. This study examines the effect of monetary policy tools, specifically interest rates and the money supply, on cost-push inflation, utilizing quarterly time series data from 2003 to 2023. The Autoregressive Distributed Lag (ARDL) model and bounds cointegration test are employed to identify both short- and long-run relationships. Results indicate that in the short term, interest rate hikes have a paradoxical inflationary effect, likely due to increased borrowing costs, whereas in the long term, interest rate increases significantly reduce inflation. However, changes in money supply show negligible effects. External factors, notably crude oil prices and exchange rate volatility, are identified as major contributors to cost-push inflation. The findings suggest that beyond traditional monetary tools, complementary fiscal measures such as targeted fuel subsidies and foreign exchange interventions are necessary to mitigate inflationary pressures in Tanzania.