Zimbabwe Central Bank faces mammoth task on inflation: Fitch

THE Reserve Bank of Zimbabwe (RBZ) will likely face strong headwinds in its quest to bring inflation down to its target of 50 percent by year-end and also stabilise the weakening Zimbabwe dollar, global economic analysis firm, Fitch Solutions, has said.

FITCH Solutions also said it expected the Reserve Bank to maintain its focus on price and exchange rate stability in 2020, but with limited success.

An unstable rate will likely continue to drive price increases that feed into infla­tion, which came in at annual rate of 560 percent for February.

The United Kingdom-based research firm said the RBZ will maintain its focus on price and exchange rate stability in 2020, especially as it continues to target a year-on-year inflation rate of 50 percent and broad stability of the Zimbabwe dollar by year-end.

“We at Fitch Solutions expect both aims to prove challenging, however. Sustained currency weakness, shortage of US dollar and the ongoing impact of drought will continue to drive inflation over the coming months, although the average annual rate will decline sharply in 2021, in part due to high base effects,” Fitch said.

Fitch said it expected RBZ to cut the bank policy rate, but this was likely to be marginal since, given weak economic fun­damentals, reductions will lead to a rise in the money supply and fuel inflation.

The rate has since been cut from 35 to 25 percent to minimise the impact of the Covid-19 pandemic on the Zimbabwean economy.

At its meeting in January, the Monetary Policy Committee (MPC) maintained its policy rate at 35 percent, which was then cut to 25 last week because of the coronavirus fallout. The MPC then stated that the RBZ would continue implementing a monetary targeting policy to anchor expectations on inflation and exchange rate stability, but indications show the bank has thus far struggled to keep a leash on money supply, although insisting the amount remains too low to warrant current dynamics.

The MPC also highlighted a downward trend in monthly inflation since October 2019 — the rate slowed to 16,6 percent in December 2019 from 17,5 percent the previ­ous month — and forecast that the monthly rate would slow to single-digit levels by the second quarter, while the annual rate would