‘Bank rate cut will not drive inflation’

THE Reserve Bank of Zimbabwe’s decision to cut the overnight rate with effect from today does not threaten the positive inflation outlook, RBZ Governor Dr John Mangudya and economists say.

RBZ’s monetary policy committee (MPC), appointed by Finance Minister Mthuli Ncube in September this year, resolved at its second meeting on Monday to reduce the overnight rate from 70 to 35 percent to stimulate lending to productive sectors.

The MPC held its inaugural meeting on October 28, 2019, a month after the RBZ increased the key overnight rate from 50 to 70 percent. The rate was 15 percent prior to the first increase.

At Monday’s meeting the committee also continued deliberations on measures to ensure Zimbabwe dollar exchange rate stability, smooth functioning of the interbank market and interventions to support economic activity without fuelling inflation.

The RBZ first increased the overnight rate from 15 to 50 percent through the midyear monetary policy in August in efforts to counter speculative borrowing and back stability of the Zimbabwe dollar following its reintroduction in June this year.

But the committee agreed on Monday to put in place measures to support liquidity constrained productive sectors of the economy by cutting the rate to redirect excess liquidity in the market.

The bank policy rate or overnight accommodation rate is the lowest lending rate at which banks can lend to each other to cover institutions with short positions.

Generally, the rate indicates the level where the central bank expects interest rates to be.

As such, a high bank rate also means borrowing in the market generally becomes pricey and discourages borrowing, especially for speculative and non-productive purposes.

Dr Mangudya said at its second meeting, the committee welcomed the 2020 National Budget that seeks to boost productivity, growth and job creation. As such, the committee underlined the need to align monetary policy to the fiscal policy, adding the reduction will not put any pressures on inflation and exchange rate stability.

“To this end, the bank rate, currently at 70 percent, requires review; notwithstanding a recent spike in monthly inflation to 38,8 percent due to shocks caused mainly by adjustments of electricity and fuel prices, the inflation outlook is positive.

“Consequently, the committee resolved to revise the bank policy rate from 70 to 35 percent with effect from November 20, 2019. This position will be reviewed at future meetings,” Dr Mangudya said.

Economist Eddie Cross concurred, saying the reason why the overnight rate was hiked had dissipated and that over the last six weeks no one had abused the overnight window.

“At the time there was considerable excess liquidity in the market place and people were borrowing money and buying foreign exchange and we wanted to stop the speculative activity,” he said.

Mr Cross said monthly inflation shot up in October because “we withdraw subsidies on fuel and food” so there was a spike in spices as the weighting of food items is heavy on the price index.

“We think that inflation is going to fall very steeply so we thought there was no need for penalty rates on the overnight accommodation levels, in fact we will review it again in our next meeting,” Mr Cross said.

He also said the bank had introduced very strict controls on new money supply and expects fluctuations in reserve money as seen over the last four months, will not occur again. In this regard, more than $1 billion in excess liquidity on the market from matured Treasury Bills has been locked away in bonds in agreement with the owners of the funds.

The bank’s rate for overnight borrowing was revised upwards from 50 percent to 70 percent to take advantage of developments on inflation and exchange rate. Zimbabwe has experienced rapid rise in inflation following a raft of reforms since September last year to realign key fundamentals, for economic sustainable growth, but this inadvertently resulted in a spike in inflation from 5,39 to 175,6 percent by June 2019.

Further, the committee resolved to set up a working group comprising RBZ officials, treasuries from authorised dealers and members of the MPC to review rules of the interbank market.

“The committee also underscored the need to incorporate bureaux de change in the process in order to expand, deepen and enhance the operational efficiency of the interbank market. In addition, the committee agreed to launch the market tracker under the Reuters system, which is intended to enhance transparency in the operation of the interbank market by end of November 2019,” Dr Mangudya said.

The central bank chief also noted the significance of exports to the country’s foreign currency receipts and agreed on the need to remove all bureaucracy that impedes the administration of exports.

The MPC also agreed that exporters must comply with timelines for repatriation of exports proceeds while those that violate the rules risk forfeiting retention of their export earnings through liquidation, upon receipt, on the interbank market.

It also noted the need to come up with quarterly monetary aggregate targets consistent with macroeconomic framework underpinning the 2020 budget, to be monitored and released to the market as part of the MPC’s disinflationary programme.