News / National
RBZ acts on inflation, interest rates
05 Apr 2022 at 06:43hrs | Views
THE Reserve Bank of Zimbabwe (RBZ) yesterday moved to curtail resurgent price increases (inflation) in the economy and stabilise the volatile parallel market exchange rate after its Monetary Policy Committee (MPC) significantly increased key interest rates and further cut down the quarter target for money supply growth.
These latest measures demonstrate authorities' desire to double down on existing measures to stem further increases in prices stoked by speculative borrowing causing excess growth of the amount of money in circulation, which is driving depreciation of local currency (exchange rate volatility) that is fuelling price hikes.
Increasing the bank policy rate, which guides the level of interest rates charged by commercial banks, will prevent economic agents from taking loans for speculative or arbitrage purposes by making money taken for unproductive activities prohibitively expensive.
Adverse developments in the market have seen annual inflation surging in the past few months, threatening a throwback into 2020, when inflation shot to a post-dollarisation high of 837,5 percent.
The pass through effects of exchange rate volatility have also seen the value of local currency, which was floated at $2,5/US$1 upon de-dollarisation in 2019, slide to over $250 to the greenback on the black market.
Authorities believe some of the unsavoury market developments over the past few months are a result of market indiscipline, which threatens to undo the huge gains achieved up to mid 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 resurging inflationary pressures and foreign exchange parallel market activities.
The measures were adopted at an MPC meeting held on April 1, 2021, whose agenda was to consider developments in the domestic and international macro-economic environment as well as impact of global geopolitical factors on the economy.
RBZ Governor Dr John Mangudya in a statement yesterday said while noting the decline in month-on-month inflation from 6,99 percent in February 2022 to 6,31 percent in March 2022, the committee was concerned with escalation in annual inflation, from 66,77 percent to 72,70 percent.
"The committee particularly noted that global inflation was on the increase as a consequence of the on-going Russia-Ukraine conflict which had secondary pass through effects on domestic and international prices.
"Rising prices of oil, gas, fertilisers and other related products had the effect of increasing global inflation and inevitably had a negative impact on domestic costs of production and destabilising the foreign exchange market," he said.
Russia is one of the top global producers of crude oil. After the Ukraine invasion, global prices of crude oil rose to 14-year highs driven by the sentiment that the conflict may affect supply and prices in Zimbabwe. Since Zimbabwe does not mine petroleum, it is a net importer hence a price taker of the foregoing global oil prices.
According to Dr Mangudya, the committee resolved to put in place, with immediate effect, measures that include reviewing upwards the Bank Policy Rate from 60 percent to 80 percent as well as reviewing upwards the Medium-Term Bank Accommodation Facility interest rate from 40 percent to 50 percent per annum.
The Bank policy rate is the benchmark rate, against banks that do not have enough liquidity to borrow overnight from the central bank to fund their operations. It therefore determines interest rates at which banks lend to the rest of the market.
The medium-term facility is a lending facility used by registered and productive businesses to secure funding required to finance their daily operations.
RBZ last reviewed the interest rates in February this year when Dr Mangudya presented the 2022 Monetary Policy Statement, indicating the bank's desire for hawkishness to reduce inflation and stabilise the exchange rate.
Additional measures included reviewing upwards the minimum deposit rates for Zimbabwe dollar savings and time deposits from 10 percent and 20 percent per annum to 12,5 percent and 25,5 percent, respectively, to encourage banking of money.
The committee also affirmed further tightening monetary policy by reducing the quarterly reserve money growth target from 7,5 percent to 5 percent for the quarter ending June 2022.
This has the effect of reducing the amount of money in the economy, especially that which may be used for speculative tendencies that upset the market.
"Further liberalising the foreign exchange market by allowing banks to conduct foreign exchange transactions of up US$1 000 under an arrangement agreed upon between banks and Bank and in terms of which individuals with free funds and entities or corporates holding foreign exchange in their foreign currency accounts (after meeting the statutory surrender requirements) shall be free to sell foreign currency to banks on a willing-buyer 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 line with international best practices.
Zimbabwe National Chamber of Commerce president Dr Tinashe Manzungu commended the measures taken by the RBZ's MPC as prompt and efficient in dealing with the current situation.
"The measures are aimed at stabilising the inflation rate and regulating the foreign exchange market.
"Global inflation is on the rise because of the disturbances on the international market triggered by Russia's military operation in Ukraine which has invited a raft of economic sanctions on Russia."
Dr Manzungu noted that the inflationary pressures the country was facing were beyond Zimbabwe as they were a result of events of the happenings on the global market.
He noted that the recent price hikes of fuel which triggered price hikes of some basic commodities were beyond local policies but commended RBZ for acting swiftly so to minimise the effects of the global market on the citizenry.
"Measures like ensuring that commercial imports are processed through normal banking channels are in line with best international practices.
"The further liberalisation of the foreign exchange market allows market forces to determine the prevailing exchange rate as well as pushing all exchanges to be done through the formal market and eliminate the black market.
"It is a positive reaction from the RBZ and it needs to be commended," said Dr Manzungu.
These latest measures demonstrate authorities' desire to double down on existing measures to stem further increases in prices stoked by speculative borrowing causing excess growth of the amount of money in circulation, which is driving depreciation of local currency (exchange rate volatility) that is fuelling price hikes.
Increasing the bank policy rate, which guides the level of interest rates charged by commercial banks, will prevent economic agents from taking loans for speculative or arbitrage purposes by making money taken for unproductive activities prohibitively expensive.
Adverse developments in the market have seen annual inflation surging in the past few months, threatening a throwback into 2020, when inflation shot to a post-dollarisation high of 837,5 percent.
The pass through effects of exchange rate volatility have also seen the value of local currency, which was floated at $2,5/US$1 upon de-dollarisation in 2019, slide to over $250 to the greenback on the black market.
Authorities believe some of the unsavoury market developments over the past few months are a result of market indiscipline, which threatens to undo the huge gains achieved up to mid 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 resurging inflationary pressures and foreign exchange parallel market activities.
The measures were adopted at an MPC meeting held on April 1, 2021, whose agenda was to consider developments in the domestic and international macro-economic environment as well as impact of global geopolitical factors on the economy.
RBZ Governor Dr John Mangudya in a statement yesterday said while noting the decline in month-on-month inflation from 6,99 percent in February 2022 to 6,31 percent in March 2022, the committee was concerned with escalation in annual inflation, from 66,77 percent to 72,70 percent.
"The committee particularly noted that global inflation was on the increase as a consequence of the on-going Russia-Ukraine conflict which had secondary pass through effects on domestic and international prices.
"Rising prices of oil, gas, fertilisers and other related products had the effect of increasing global inflation and inevitably had a negative impact on domestic costs of production and destabilising the foreign exchange market," he said.
Russia is one of the top global producers of crude oil. After the Ukraine invasion, global prices of crude oil rose to 14-year highs driven by the sentiment that the conflict may affect supply and prices in Zimbabwe. Since Zimbabwe does not mine petroleum, it is a net importer hence a price taker of the foregoing global oil prices.
According to Dr Mangudya, the committee resolved to put in place, with immediate effect, measures that include reviewing upwards the Bank Policy Rate from 60 percent to 80 percent as well as reviewing upwards the Medium-Term Bank Accommodation Facility interest rate from 40 percent to 50 percent per annum.
The Bank policy rate is the benchmark rate, against banks that do not have enough liquidity to borrow overnight from the central bank to fund their operations. It therefore determines interest rates at which banks lend to the rest of the market.
The medium-term facility is a lending facility used by registered and productive businesses to secure funding required to finance their daily operations.
RBZ last reviewed the interest rates in February this year when Dr Mangudya presented the 2022 Monetary Policy Statement, indicating the bank's desire for hawkishness to reduce inflation and stabilise the exchange rate.
Additional measures included reviewing upwards the minimum deposit rates for Zimbabwe dollar savings and time deposits from 10 percent and 20 percent per annum to 12,5 percent and 25,5 percent, respectively, to encourage banking of money.
The committee also affirmed further tightening monetary policy by reducing the quarterly reserve money growth target from 7,5 percent to 5 percent for the quarter ending June 2022.
This has the effect of reducing the amount of money in the economy, especially that which may be used for speculative tendencies that upset the market.
"Further liberalising the foreign exchange market by allowing banks to conduct foreign exchange transactions of up US$1 000 under an arrangement agreed upon between banks and Bank and in terms of which individuals with free funds and entities or corporates holding foreign exchange in their foreign currency accounts (after meeting the statutory surrender requirements) shall be free to sell foreign currency to banks on a willing-buyer 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 line with international best practices.
Zimbabwe National Chamber of Commerce president Dr Tinashe Manzungu commended the measures taken by the RBZ's MPC as prompt and efficient in dealing with the current situation.
"The measures are aimed at stabilising the inflation rate and regulating the foreign exchange market.
"Global inflation is on the rise because of the disturbances on the international market triggered by Russia's military operation in Ukraine which has invited a raft of economic sanctions on Russia."
Dr Manzungu noted that the inflationary pressures the country was facing were beyond Zimbabwe as they were a result of events of the happenings on the global market.
He noted that the recent price hikes of fuel which triggered price hikes of some basic commodities were beyond local policies but commended RBZ for acting swiftly so to minimise the effects of the global market on the citizenry.
"Measures like ensuring that commercial imports are processed through normal banking channels are in line with best international practices.
"The further liberalisation of the foreign exchange market allows market forces to determine the prevailing exchange rate as well as pushing all exchanges to be done through the formal market and eliminate the black market.
"It is a positive reaction from the RBZ and it needs to be commended," said Dr Manzungu.
Source - The Herald
