There is a fair amount of musing in financial circles over when the bank policy rate, the standard minimum interest rate on ordinary bank borrowing, will come down from the 200 percent a year set on June 24, but in our view, and we think in the view of the authorities, no one should be holding their breath.
There are several good reasons why interest rates should not be allowed to fall too soon or too quickly.
For a start the high interest rate was instrumental in removing a lot of speculative activity in the black market for foreign currency, by making it too expensive, and that in turn removed a lot of inflationary pressure. The hiking of the policy rate was using classical economics to kill an inflationary spike, by allowing market forces to do the killing, but it can be safely assumed that the Reserve Bank of Zimbabwe, and the Government, want to see that spike not just dead but not even twitching.
An interest rate of 200 percent a year is 16,67 percent a month. The month-on-month inflation has only been below that rate for four months, since August when it reached 12,4 percent. The month-on-month inflation only went well below the 16,67 the following month, when it fell to 3,5 percent, before drifting down to 3,2 percent in October before finally reaching a rational 1,8 percent in November.
Another way of looking at month-on-month inflation is to annualise the monthly rate, and here we get some not so wonderful news. The August 12,4 percent comes out at 305,74 percent, still above the 200 percent policy rate. It then did fall significantly to 50,66 percent in September, 45,14 percent in October and 23,81 percent in November. But whichever way you look at it the borrowing rate has only been seriously positive for three months.
The second factor is to look at the annual inflation rate. Here there is a major lag, since the spike between April and August will be hanging around the calculation for another nine months before it is removed from the sums. When the 200 percent was put in place annual inflation was 191,6 percent, just the second month of three-digit annual inflation, and any brief glance at the figures would suggest that 200 percent was the correct rate, although most of the inflation had been in the last two months.
But even as monthly inflation started inching down the following month, July, the annual rate kept rising to 256,9 percent, thanks to the gap between the latest monthly rate and the monthly rate a year earlier that was being pushed out of the sums. Even with a second month of falling monthly inflation, the annual rate kept rising because while monthly rates were falling the actual level was still high and higher than a year earlier. So we hit 285 in August.
We only reached the stage where this year’s monthly rate was below last year’s for the same month in September, and since then we have had another two months of that desirable outcome, But even the November annual rate was still 255 percent, even after three months of 2022 inflation being below 2021 monthly inflation.
Although we, and others, have argued that the annual inflation rate is not really a useful figure for most purposes when you have a discontinuous function, and that we have certainly had this year with that spike, it still does measure what has happened over the past 12 months, although is probably useless for predicting what will happen.
Despite the discontinuity, there is that problem that some of the outstanding loans attracting the 200 percent plus interest were taken out some months ago, and the annual inflation rate in these circumstances can justifiably guide the setting of annual interest rates.
A second factor are those outstanding loans made for speculative purposes. At the moment those who borrowed to play the stock exchange or borrowed to arbitrage on the black market may not have tried to liquidate their position and might still be hoping that the black market stability and resultant low inflation is temporary, and that in any case the bulls might return to the Zimbabwe Stock Exchange and allow them to move out with at least some buttons on their shirt.
In both these speculative assaults on equities and black market currency, the borrowers would have been hoping for monthly changes of more than 17 percent so they could return to the chosen market as a seller in two or three months, or even taking the long term over five or six months, and make a profit after paying their interest bills and transaction charges.
There appears to be a strong case, a very strong case, to ensure that these borrowers not only do not make a profit but also lose their entire shirt, not just a few buttons. This is the first time the Reserve Bank as the monetary authority has used positive borrowing rates to tame an inflationary spiral or spike, and those causing and even desiring such spirals need to understand that this is not going to create wealth.
The next reason why it is too soon is that when presenting the national budget in November Minister of Finance and Economic Development Mthuli Ncube was not exactly ecstatic about monthly inflation being between 3 and 4 percent. He set a target of 1 percent to 3 percent and instructed the Reserve Bank, as the monetary authority, to use all means consistent with its mandate to reach and maintain that target.
The November monthly inflation figure of 1,8 percent was the first time for 19 months that we were in that range, so the Reserve Bank, with Treasury backing, will be wanting to screw in those sort of results.
The next reason is more on general policy. Zimbabwean consumers tend to be the sort who like to borrow to buy, rather than save to buy. A lot of that attitude has come in over the years of negative interest rates, so it makes sense to borrow since you pay back less, in real terms. There was a bit of positive rates during part of the dollarisation era, but that as we found later was fake stability, allowed because no one wanted to rock the boat even though economists were pointing out the resumption of what amounted to money printing.
Another major burst of consumer credit is about the last thing the economy needs, with only speculators howling in pursuit of ephemeral profits being worse. With the present monthly inflation savers can get positive interest rates, for the first time in several years, but the saving rates are dependent on what the banks can lend money out for.
There are arguments that productive sectors are being hit by the high interest rates, and to some extent they are although there are safety valves.
For a start there are two limited facilities, the Medium Term Bank Accommodation Facility and the Micro, Small and Medium Enterprises Facility. The MBA facility has a lending rate of 100 percent, and largely feeds agriculture. The Reserve Bank agrees that this interest rate is on the high side but says anything will lower will allow rampant arbitraging.
There was an attempt early in the inflation spike to get banks to act responsibly and push the envelope on the know-your-customer policy. The appeal was for bank to limit sharply lending for non-productive purposes. While a speculator is unlikely in their application for a loan to state they want to play the stock exchange or the black market, there was a lot of just pure consumer lending, without any attempt to tie the loan to say capital assets being bought, or even to working capital.
In fact 12 of the 16 banks were eventually caught out making loans that could be considered to be driving speculation. It was shortly after this that the whole approach to fighting inflation by destroying the black market came into force using market forces rather than appeals to good nature or even civil penalties.
The interbank market was opened up to become a serious market-maker setting rates, the bank policy rate was shoved right up, and the gold coins were minted to mop up surplus liquidity in local currency. So by insisting on market forces the banking sector in effect forced the hand of the authorities to putting in real interest rates, and now they can live with them.