‘Fear of future inflation epicentre of price hikes’
FEAR of future inflation is at the epicentre of rampant price increases being experienced in the economy but the Reserve Bank of Zimbabwe says it will put in place confidence building measures that will see month-onmonth inflation close the year below 5 percent, while year-on-year inflation is forecast to close at 50 percent.
Presenting the 2020 Monetary Policy Statement yesterday, RBZ governor Dr John Mangudya said focusing on confidence building through “effective communication” by the apex bank has become “extremely important” in view of the fact that “a key factor that causes inflation in Zimbabwe is people’s expectations of future inflation”.
According to Zimbabwe National Statistics Agency (Zimstat) month-on-month inflation averaged 17 percent in 2019 resulting in the erosion of disposable incomes and serious reduction in aggregate demand.
While market watchers blame the inflation scourge on increased money supply, which reached $34,5 billion in December 2019 as well as a weakening foreign currency exchange rate, the central bank is of the view that inflation is mainly a result of non-monetary factors.
“These non-monetary factors are grounded on the public’s past negative experiences with inflation,” explained Dr Mangudya calling lack of confidence “the epicentre” of inflationary developments in the country.
“Focussing on confidence building through effective communication and forward guidance by the Bank has also become extremely important in view of the fact that a key factor that causes inflation in Zimbabwe is people’s expectations of future inflation.”
Apart from focusing on what he called “effective communication” though not elaborated on, Dr Mangudya said the central bank is committed to improving the depth and efficiency of the interbank foreign exchange market with a view to enhance its efficacy and thus ensuring a credible, predictable and sustainable exchange rate determination framework.
Currently there is a 70 percent gap between the official interbank rate and what is prevailing on the parallel market. Business operators have been tracking both the official and parallel market exchange rate in the pricing of goods and services and the weakening exchange rate from a start rate of 2,5 to the US dollar early last year, to the current 17,8 has meant rampant prices increases.
The RBZ thus believes, improving the depth and efficiency of the interbank foreign exchange market will “produce stability and enhance confidence in the foreign currency market,” and in the process price stability.
In addition, the central bank is targeting the stock of money in circulation to ensure that “it does not cause inflation and/or bring volatility to the exchange rate”.
To do that, the RBZ is mulling introducing a corporate bond, among other open market instruments that will be used to mop up liquidity from the few firms that control at least half of the $34,5 billion in broad money supply.
The central bank is confident its policy mix “whose key ingredients are monetary discipline and an efficient foreign exchange market” will be effective in “stabilising consumer prices and the exchange rate” resulting in a single digit inflation rate by year end.
“The stable exchange rate, is then set to anchor the country’s disinflation programme through which monthly inflation is forecast to close the first quarter in single digit levels of below 5 percent. This trend would see the year-on-year inflation coming down to around 50 percent by December 2020,” said Dr Mangudya.
The single digit forecast is achievable if latest inflation figures are anything to go by. For the first time since April 2019, month-on-month inflation dropped to a single digit of 2,2 percent for the month of January 2020. This is after food and non-alcoholic beverages month-on-month inflation rate stood at 2,55 percent in January 2020, while non-food month-on-month inflation rate stood at 1,99 percent for the same period.
The central bank said the confidence dividends from preserving the anchors of macroeconomic stability, notably, inflation and exchange rate stability will help to manage inflation expectations and foster a conducive environment for increased production and productivity within the national economy, thus underpinning the thrust of the 2020 National Budget.