Interest rates

The RBZ acts on inflation, interest rates

the herald

Nelson Gahadza Senior Business Journalist

THE Reserve Bank of Zimbabwe (RBZ) yesterday decided to curb the resurgence of price rises (inflation) in the economy and stabilize the volatile parallel market exchange rate after its Monetary Policy Committee (MPC) significantly increased key interest rates and further reduced the quarterly money supply growth target.

These latest measures demonstrate the authorities’ willingness to double the existing measures to stem further price increases fueled by speculative borrowing leading to excessive growth in the quantity of currency in circulation, which leads to a depreciation of the local currency (volatility of the exchange rate). de change) which feeds hiking prices.

The increase in the bank’s key rate, which guides the level of interest rates charged by commercial banks, will prevent economic agents from contracting loans for speculative or arbitrage purposes by returning the money taken for unproductive activities to a prohibitive cost.

Adverse market developments have seen annual inflation rise in recent months, threatening to return in 2020, when inflation hit a post-dollarization high of 837.5%.

The pass-through from the effects of exchange rate volatility has also seen the value of the local currency, which was floating at $2.5/US$1 during dedollarization in 2019, slip to over $250 against the greenback. on the black market.

The authorities believe that some of the unsavory market developments in recent months are the result of market indiscipline, which threatens to undo the huge gains made until the middle of last year, when inflation hit its lowest point in about two years.

The RBZ’s Monetary Policy Committee (MPC) reiterated the need for the central bank to remain focused on inflation by putting in place additional policy measures in response to the surge in inflationary pressures and parallel foreign exchange market activities .

The measures were adopted at a meeting of the MPC held on April 1, 2021, the agenda of which was to examine the evolution of the national and international macroeconomic environment as well as the impact of global geopolitical factors on the ‘economy.

RBZ Governor Dr John Mangudya said in a statement yesterday while noting the month’s declinemonthly inflation from 6.99% in February 2022 to 6.31% in March 2022, the committee expressed concern about the escalation of annual inflation, from 66.77% to 72.70%.

“The committee particularly noted that global inflation was on the rise due to the ongoing conflict between Russia and Ukraine, which had secondary repercussions on domestic and international prices.

“Rising prices for oil, gas, fertilizers and other related products have had the effect of increasing global inflation and have inevitably had a negative impact on national production costs and destabilized the foreign exchange market” , did he declare.

Russia is one of the world’s leading producers of crude oil. After Ukraine’s invasion, global crude oil prices soared to 14-year highs, pushed by the feeling that the conflict could affect supply and prices in Zimbabwe. Since Zimbabwe does not exploit oil, it is a net importer and therefore a price taker of the foregoing world oil prices.

According to Dr. Mangudya, the committee has decided to put in place, with immediate effect, measures which include the upward revision of the Bank’s key rate from 60% to 80% as well as the upward revision of the interest on the Bank’s medium-term credit facility of 40% to 50% per annum.

The Bank’s policy rate is the benchmark rate, against banks that do not have enough cash to borrow overnight from the central bank to fund their operations. It therefore determines the interest rates at which banks lend to the rest of the market.

The Medium Term Facility is a loan facility used by registered and productive businesses to obtain the financing needed to finance their day-to-day operations.

The RBZ last reviewed interest rates in February this year when Dr Mangudya presented the 2022 monetary policy statement, indicating the bank’s desire to be hawkish to reduce inflation and stabilize the rate change.

Additional measures included revising the minimum deposit rates for Zimbabwean dollar savings and term deposits upwards from 10% and 20% per annum to 12.5% ​​and 25.5%, respectively, to encourage the banking of money.

The committee also affirmed a further tightening of monetary policy by reducing the reserve currency’s quarterly growth target from 7.5% to 5% for the quarter ending June 2022.

This has the effect of reducing the amount of money in the economy, especially that which can be used for speculative tendencies that disrupt the market.

“Continue the liberalization of the foreign exchange market by allowing banks to carry out foreign exchange transactions up to USD 1,000 under an agreement agreed between the banks and the Bank under which individuals with free funds and entities or businesses holding foreign currency in their foreign currency accounts (after meeting legal redemption requirements) will be free to sell foreign currency to banks on a willing buyer and willing seller basis,” said Dr. Mangudya.

He added that the central bank will also ensure that commercial imports are processed through normal banking channels in accordance with international best practices.

The President of the Zimbabwe National Chamber of Commerce, Dr Tinashe Manzungu hailed the action taken by the RBZ MPC as swift and effective in addressing the current situation.

“The measures are aimed at stabilizing the inflation rate and regulating the foreign exchange market.

“Global inflation is on the rise due to disruptions in the international market triggered by the Russian military operation in Ukraine which has prompted a series of economic sanctions against Russia.”

Dr. Manzungu noted that the inflationary pressures the country was facing went beyond Zimbabwe as they resulted from events in the global market.

He noted that recent fuel price hikes that triggered price hikes for some commodities were beyond local politics, but praised RBZ for acting quickly to minimize the effects of the global market on citizens.

“Measures such as ensuring that commercial imports are processed through normal banking channels are in line with international best practice.

“The further liberalization of the foreign exchange market allows market forces to determine the prevailing exchange rate as well as pushing all trade to be through the formal market and eliminating the black market.

“It’s a positive reaction from the RBZ and it is to be commended,” Dr Manzungu said.