Zimbabwean Central Bank plots hawkish monetary policy

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The Reserve Bank of Zimbabwe (RBZ) is next week expected to present a hawkish monetary policy statement, the apex bank believes will help contain money supply growth, arrest inflationary pressures and stabilise the exchange rate.

Such a monetary policy favours high interest rates and keeps inflation low as its priority, while a dovish one tends to be expansionary and supports low interest rates.

High interest rates make borrowing less attractive, restricting growth of liquidity while low interest rates encourage credit-taking and drive money supply or liquidity growth.

Zimbabwe was last year blighted by episodes of high liquidity-driven exchange rate depreciation, especially on the black market, which eventually filtered into the general pricing system.

In what also exhibited weakness in the local currency, the auction system exchange rate appeared to take some knocks after breaking above 100/US$1 for the first time.

The movement in the official exchange rate has been viewed in certain quarters as indicating the independence of the rate to follow market sentiment after accusations the central bank was accused of manipulating it to keep it low.

The Zimdollar now trades around $250/US$1 on the black market and at $116/US$1 on the auction rate, which has resulted in prices going up markedly in recent months.

The continued slide in the Zimbabwe dollar value last year saw fiscal and monetary authorities miss most of the inflation targets they had set for the year.

Generally, authorities had predicted inflation would close the year at single digit levels, before revising the target, initially, to between 25 and 30 percent.

But when it appeared inflationary pressures remained elevated the central bank and Treasury further revised the year end inflation target to 58 percent, but again, this could not be met.

Zimbabwe’s annual consumer price inflation surged for the fourth straight month to 60,7 percent in December of 2021, from 58,4 percent in November.

That was the highest inflation rate since June, even though the central bank raised in October its main lending rate to 60 percent in an attempt to tame that increase and to stabilise the free-falling Zimbabwe dollar.

Zimbabwe’s annual inflation rate had registered a significant decline though since peaking at post-dollarisation record of 837,5 percent in July 2020 to 50,2 percent in August last year.

The local unit has come down a long way after being floated for the first time, since the scrapping of the multi-currency regime at $2,5/US$1 in February 2019.

Still blighted by episodes of volatility and strong inflationary pressures, RBZ Governor Dr John Mangudya said in an interview focus would fall on arresting money supply.

The bank hopes a tight money supply scenario would arrest the down slide in the Zimdollar, which has pass through effects in the level of pricing in the economy.

“We said we are maintaining strict money targeting framework; it means its a hawkish monetary policy, it is not dovish, we want to contain the supply of money because everything can be reduced to money.

“However you get the money, to transact you need money, so we want to look at “what are the sources of the supply of money? It means we need to plug the holes,” he said.

According to latest statistics from the central bank, Zimbabwe’s reserve money for the week to January 14, 2022 increased by just over a billion to $27 billion.

The central bank last year further reduced its quarterly money supply growth target from 22,5 percent to 20 percent, as part of stricter measures to restrict liquidity, contain inflation and stabilise the currency.

Nonetheless, broad money supply grew by 145,95 percent to $417,56 billion in the 12 months to October 2021, with analysts saying the source of growth remained largely unexplained.

Authorities noted some positives in efforts to maintain and improve the relative stability in the economy, especially regarding the dis inflationary path of 2021, which was underpinned by tight fiscal and monetary stance.

Finance and Economic Development Minister, Mthuli Ncube, said in his 2022 national budget statement that Treasury and the RBZ would institute measures to achieve average inflation target of 32,6 percent and year end inflation of 15-20 percent.

Dr Mangudya last week said the apex bank would this year take all measures possible to ensure the auction remains a dependable source of forex, which is key in driving growth and managing inflation and the domestic currency.

Over US$1,7 billion was sold to importers for key imports in 2021, including for machinery, equipment and raw materials, but inadequate supply keeps driving economic agents to alternative market, which stokes inflation embers.

Economist, Eddie Cross, said this week authorities will need to implement strong measures to support the domestic currency in order to grow its appeal among users this year.

Business leaders have also warned the Government to lead from the front by promoting the use of the domestic currency in payments for products and services, to maintain the currency relevance. – Herald