* Tanzania does not set interest rates regularly
* Says the outlook for inflation is benign
* Sees GDP growth of 7.2 pct this year
By Duncan Miriri
NAIROBI, May 19 Tanzania's central bank plans to start using interest rates regularly to set monetary policy in the next four years, giving itself time to ensure a smooth transition from the present system of influencing growth and inflation through other financial tools, its governor said.
The east African nation, which has the second largest economy in the region, uses a range of instruments like foreign exchange interventions, rather than interest rates, to implement its monetary policy.
The central bank in the region's economic powerhouse Kenya, sets rates every two months while neighbouring Uganda adopted monthly rate-setting meetings in 2011 to combat high inflation.
"We have made a decision now that we want to shift towards setting prices rather than setting quantities but we will do that in a transition that makes sure we don't lose the current effectiveness of what we are doing," Governor Benno Ndulu told Reuters on the sidelines of a meeting in the Kenyan capital.
"We think in the next four years we should be able to finish this."
Ndulu said Tanzania had managed to contain inflation after it soared to a peak of just under 20 percent in December 2012, driven by a double-whammy of high oil and food prices.
Year-on-year headline inflation stood at 6.3 percent in April while core inflation was 4.3 percent.
Ndulu said the overall rate was below the East African Community (EAC) monetary union's preferred rate of 8 percent inflation in the region and the outlook was benign.
"Prospectively, given that Tanzania at this time expects to have fairly good harvests and you know food is one of the biggest drivers of inflation, we expect to remain in single digits not too far from where we are," Ndulu said.
The benchmark interest rate Tanzanian Treasury bills was "fairly high" at about 12 percent, the central bank chief said, adding that the government's move to allow investors from the EAC to invest in the securities could spur demand and drive yields down.
He said he expected the economy to expand by 7.2 percent this year from 7.0 percent in 2013, with the main risk being any instability in the global economy.
"We expect good growth in agriculture. We also expect power supply to improve. We think cement production will start kicking in soon," the governor said.
Plans by the country to issue its first dollar bond in the financial year starting July were on course, Ndulu said, with the work of acquiring a credit rating expected to be completed by the end of this year.
Citi bank is assisting Tanzania to get the rating assigned in readiness for the sovereign bond whose size will be determined later. (Editing by James Macharia & Shri Navaratnam)