eBusiness Weekly
Golden Sibanda
None of Zimbabwe’s 18 registered commercial banks has used the Reserve Bank of Zimbabwe (RBZ) overnight window since the apex bank hiked its bank rate from 15 percent to 50 and finally 70 percent over a short period to discourage speculative borrowing and protect the local currency.
The RBZ hiked the bank rate after Finance and Economic Development Minister Mthuli Ncube in February this year removed the parity pegging between the RTGS and US dollar and latter in June replaced the multi-currency regime with a mono-currency whose exchange rate has depreciated extensively due to too much reserve (idle) money in the market.
Zimbabwe had since February 2009 used a basket of currencies dominated by the United States dollar after the country scrapped its domestic currency because it had been rendered worthless by hyperinflation over the decade of economic meltdown to 2008.
The overnight accommodation rate is the interest rate at which depository institutions (generally banks) lend or borrow funds with another depository institution in the overnight market.
Usually, the rate is set by central bank to target monetary policy. In most circumstances, the overnight rate is the lowest available interest rate, and as such a high rate discourages borrowing by making it expensive to borrow, more so for speculation like currency trading.
RBZ governor Dr John Mangudya told journalists in the capital on Tuesday that none of the country’s registered financial institutions had resorted to the overnight accommodation window of the central bank since the steep hikes of monetary authority’s bank rate.
Dr Mangudya said banks had not borrowed from the central bank to cover short positions because they had enough for their daily operations, although they lacked funds to invest in productive sectors.
“The 70 percent overnight window; it’s not that banks should also charge 70 percent (interest). It is an indication of what we believe, as MPC (Monetary Policy Committee) the rate should be, which we will continue to revise from time to time,” Dr Mangudya said.
Prior to the central bank increasing the bank rate, banks’ lending rates were capped at 18 percent per annum, but short up to 35 percent when the bank rate was raised to 50 percent and increased further to around 45 percent per annum once the bank rate hit 70 percent.
“As the MPC, we have agreed among the committee members that we shall be meeting on a fortnightly basis this year and (later) go to a monthly basis like any other central banks. So (as the MPC), we want to meet on a fortnightly basis and see the base level for these rates.
“Otherwise, yes, they (banks) haven’t borrowed at that rate because the banks themselves have got sufficient funds on their daily positions, but what they do not have are sufficient funds to promote production,” he said.
The central bank hiked the overnight rate twice within three months, as it sought to discourage borrowing for speculative activities in the currency market amid runaway inflation. Zimbabwe’s annual inflation has raced from a lowly 5,39 percent in September last year to 175,5 percent in June this year when the official inflation figures were last released.
While publication of annual inflation has been suspended until February to allow for data collection year based on same currency based consumer price indices following the currency reforms that started in February this year.
However, the central bank has projected the monthly inflation rate, which has fallen to 17,72 percent in August from 39,26 in April, is forecast at 10-12 percent by the end of this year.
Dr Mangudya said since inflation is pushed by money supply growth in the market, the bank would target flow of money into the market and aims to contain it below 50 percent for the 12 months to December. But for the 8 months’ period to date, money supply has grown by 80 percent.
The decision to hike the overnight rate was also aimed at discouraging speculative borrowing and growth in reserve money that has largely been blamed for weakening the domestic currency.
The local currency, first introduced in February following the removal of the 1 to 1 pegging between RTGS and US dollar when Zimbabwe was still under a multi-currency system and in June the currency was renamed Zimbabwe dollar while a mono-currency regime was adopted.
The currency, however, has depreciated from 1 to 2,5 in February to 1 to 15,67 currently.
