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This study seeks to investigate the asymmetric effects of fiscal balance on monetary policy transmission, amidst the transition to policy rate framework in Tanzania. Based on the theory of sovereign risk premium, the study applies asymmetric cointegration modelling in a non-linear autoregressive distributed lag model to distinguish the effects of negative and positive changes in the fiscal deficit on interest rates, exchange rates and inflation. Findings indicate that interest rate and exchange rate reacts differently to negative and positive changes in fiscal deficit over the long run, and inflation responds differently to the changes over the long run and short run period. The findings further revealed that interest rate is more sensitive to the worsening in fiscal deficit, accordingly fiscal consolidation is an essential requirement for effective transmission of the monetary policy. In particular, implementation of the new monetary policy framework should therefore be considered carefully, as the persistent rise in budget deficits would eventually counter the effectiveness of monetary policy by keeping market interest rates and inflation at high levels. The findings provides evidence in favour of the key role of fiscal policy to stabilise policy variables, but also highlights the importance of long-term fiscal sustainability for attainment of monetary policy objectives.<br>