Auction suppresses excess liquidity: RBZ

THE Reserve Bank of Zimbabwe (RBZ) believes the bank’s Tuesday weekly foreign exchange auction platform has drained significant liquidity from the banking system and created perfect conditions for sustainable exchange rate stability. Since May reserve money has been on a downward trend and only went up to $15 billion for the week ending July 10 where it’s expected to come over again going forward. This comes as central bank governor Dr John Mangudya said the monetary authorities will maintain a stranglehold on their reserve money targeting policy framework to maintain exchange rate stability, given the undesirable effect of depreciation in fuelling domestic inflation. He said with the reserve bank currently selling more foreign currency than it is buying from holders of the hard currency, the auction had the effect of whittling down the amount of local currency in circulation. “The banks hold current accounts with the Reserve Bank and their balances with the central bank is what we call reserve money. As such, we measure how much reserve money the banks hold and when they buy forex we reduce the balance of their bank accounts in our books,” Dr Mangudya said. The central bank chief said the more banks have as liquid cash in their current accounts, the more they are likely to lend to their customers, which drives the appetite for forex and at times inadvertently exerts pressure on the exchange rate. The domestic market has experienced relative exchange rate and prices stability since the introduction of the foreign exchange auction just over four weeks ago, which replaced the ineffective interbank market and the temporary fixed rate ◆