eBusiness Weekly
Business Writer
The Reserve Bank of Zimbabwe yesterday released a hawkish 2021 Monetary Policy Statement that, if followed through, might result in price and exchange rate stability.
Monetary Policy Statements (MPS) are described as hawkish when they raise interest rates to fight inflation.
And in what is a clear indication that the central bank is concerned about the depreciating local currency on the parallel market and the uptick in inflation, it raised interest rates across board.
While the Zimbabwe dollar has weakened marginally on the official foreign currency auction system from approximately 82 to 83,75 against the US dollar, it has fared worse on the parallel market with the premium now between 30 and 40 percent.
At the same time, annual inflation, which had been on a decline from a peak of 837 percent in July 2020 to 348 percent by December, has also started to pick up, closing at 362 percent in January 2021. Month-on-month inflation for January increased to 5,4 percent from 4,2 percent in December.
While the central bank expressed satisfaction with how it managed the exchange rate and inflation in the second half of 2020, it said there is need to maintain and strengthen the measures in order to maintain macro-economic stability.
In order to maintain monetary and financial system stability, the RBZ has with immediate effect, increased the bank policy rate for overnight accommodation from 35 percent to 40 percent.
The medium term lending rate for the productive sector was increased to 30 percent from 25 percent per annum.
The RBZ said the decision on interest rates takes into account the current liquidity conditions in the market and the need to continue controlling speculative borrowing.
Analysts, however, said with inflation still above 300 percent, lending rates of 40 percent and below will not have much of an impact on speculative borrowing.
Cash rich institutions and individuals are unlikely to be tempted by money market instruments still paying negative real interest rates against inflation.
Unless there is an uptick in demand and hence the need to channel resources to the productive sector, funds might continue chasing stocks and foreign currency, according to Walter Mandeya of Trigrams Investment.
Mandeya is of the opinion that changing interest rates or statutory reserves by 5 percent is not going to change lending behaviour “at all”.
“It is therefore, meaningless as a policy measure,” he said.
Mandeya added that the central bank will soon be put to test as the country heads into the harvesting season where grain from the expected bumper harvest will have to be paid for.
The country is expecting a bumper harvest and the Grain Marketing Board is expected to pay as much as $32 000 per tonne.
However, some market watchers believe the rate hikes will result in stocks coming off amid tight liquidity.
In a Twitter comment just after the release of the MPS, financial advisory firm Emergent Securities, said the RBZ’s pull back in liquidity is set to drain the liquidity that has propelled the Zimbabwe Stock Exchange.
“Time to liquidate some of the liquid names, increase our cash holdings and standby,” Emergent Securities tweeted.
Statutory reserves were increased to 5 percent from 2,5 percent for demand and/or call deposits.
The central bank, however, maintained statutory reserves for time deposits at 2,5 percent.
“The differentiation of statutory reserves by maturity is expected to incentivise banks to hold long term liabilities or time deposits which will facilitate long term lending in the medium-term,” the RBZ explained.
The central bank said it will maintain the conservative monetary targeting framework in 2021.
This will be done by reducing the quarterly reserve money growth from the 25 percent quarterly target in 2020 to 22,5 percent per quarter in 2021.
“The current stability in inflation and exchange rate needs to be safeguarded, maintained and sustained.
“The reserve money target of 22,5 percent is consistent with the targeted end of year inflation of below 10 percent and the projected 7,4 percent economic growth rate of the economy” reads part of the 2021 Monetary Policy Statement.
The central bank said maintaining the foreign currency auction system remains paramount in anchoring inflation and maintaining price and financial system stability.
“The Bank shall continue refining the foreign exchange auction system taking into account market fundamentals as well as closely monitoring the utilisation of funds from foreign exchange auction system and the economy at large.
