RBZ sees sustained inflation decline

THE Reserve Bank of Zimbabwe (RBZ) expects the annual inflation rate to keep falling until year-end, but has revised upwards its December 2021 target to between 36 percent and 53 percent, from 25 percent to 35 percent.

But the central bank believes this will not take the steam out of the projected economic growth of 7,8 percent after a stellar agricultural season.

In an economic update issued on Thursday, RBZ governor Dr John Mangudya said inflation will maintain its downward trajectory, albeit at a slower pace.

"Overall, the bank is confident that the current downward inflation trajectory and stability of the exchange rate will be sustained in the outlook period supported by a buoyant external sector performance, driven by strong recovery in the global economy."

He said inflationary pressures were being driven by steadily rising global prices, increased liquidity from Covid-19-induced economic stimulus, planned adjustment of power tariffs and a weakening open market exchange rate.

Inflation has been progressively declining from a peak of 837,5 percent in July 2020 to 51,55 percent by September 2021.

Based on the observed month-on-month average inflation of 2,5 percent, annual inflation is now projected to end the year below 50 percent under the baseline scenario (assuming no intervening forces).

Dr Mangudya said possible adjustments in some administered prices, especially electricity, whose price was expected to be reviewed in the third quarter of the year, provided downside risks.

International food prices are also expected to increase by about 25 percent in 2021 before stabilising in 2022.

Continued loss of value of the local currency against the US dollar is expected to exert inflationary pressures on the economy.

While the exchange rate on the foreign currency auction market has stabilised at US$1:$86,7, the open market exchange rate had recently moved from about US$1:$130 to about US$1:$160, implying a parallel market premium of above 70 percent, whose pass-through effects could put pressure on prices.

"In view of recent developments, annual inflation is likely to end the year between 35 percent to 53 percent, up from the revised targets of between 25 percent and 35 percent. In addition, the increase in international food and oil prices as well as global inflation continue to exert additional inflation pressures in the domestic economy," Dr Mangudya said.

In line with the RBZ's conservative monetary targeting stance, reserve money growth, which is a strong determinant of inflation levels in any economy, has slowed.

As at week ending September 17, 2021, reserve money stock stood at $28,9 billion, well within the end-September quarterly target of $29 billion.

Following reduction in the quarterly reserve money target to 20 percent, reserve money would be contained within the target of $35 billion by December 2021.

The economy is anticipated to rebound from a decline of minus 5,3 percent in 2020 to 7,8 percent in 2021.

However, an average growth rate of above 5 percent annually is projected in the medium term, especially the period spanning the National Development Strategy (NDS1), as Zimbabwe plans to transition to an upper middle-income economy by 2030.

The envisaged strong growth for this year will be anchored on a good agricultural season, higher international mineral commodity prices, stable macro-economic environment and subdued Covid-19 pandemic.

The projected higher economic growth this year, Dr Mangudya added, was being driven by higher growth in the sectors of agriculture, electricity generation, accommodation and food services, as well as financial services.

The RBZ continues to ensure that the productive sectors of the economy access capital and foreign currency to meet their import requirements.

The auction system has ensured uninterrupted financing of key imports such as raw materials and capital and equipment for the productive sectors.