“It’s not the interest rate”: How Mangudya is defending his under-fire rate policy

Reserve Bank of Zimbabwe governor John Mangudya on Monday defended the central bank’s interest rate policy against charges that negative rates were fuelling exchange rate instability and inflation.

The central bank on Monday maintained its overnight accommodation rate  – a key policy rate – at 35% per annum, at a time when inflation is running around 500% on an annualised basis.

Critics of the RBZ’s stance say the significantly negative real rates allowed speculators to borrow cheaply and fund foreign currency purchases on the black market.

Mangudya blames 200 entities, who hold between ZWL$2 million and ZWL$1.5 billion each and account for about 50% of the total bank deposits in the economy – not low interest rates – for regular bursts of exchange rate volatility.

“We have noticed, and we have evidence, it’s not the interest rate that is causing people to go and buy money from the parallel market or to spend on luxuries. The largest proportion of the population of Zimbabwe, they don’t have access to RTGS (electronic deposits), they have no RTGS. None in this room have excess RTGS,” Mangudya said, motioning to central bank executives, bank chief executives, economic analysts and journalists gathered for his monetary policy speech.

“We look at the numbers, you’re not part of the 200. You can’t move the rate. We need to be realistic.”

He added that increasing interest rates at a time when spending in the economy was shrinking would be counter-productive.

“We’re almost in a Catch 22 situation, whereby aggregate demand is going down but inflation is going up, caused by a few people. Go to companies like Delta, like Schweppes, they will tell you that demand has gone down. Disposable incomes have gone down. Now, just imagine, if we increase interest rates to 70% or 100%, what are you trying to achieve? Nothing,” an impassioned Mangudya said.

“We have noticed that the major attribute of inflation in this country is the exchange rate. The people are saying, ‘do we trust you that inflation is going down?’ It’s not about people borrowing money from the bank to use it for nefarious transactions. No, we are not convinced about that. The people with excess money in their pockets are the ones going to the market because they want to preserve value.”

Mangudya said the central bank had created a medium-term bank accommodation (MBA) window through which banks could extend as much as ZWL$1.5 billion in lending to the productive sector, at a time when firms were struggling to access funding. 

The interest rates on the MBA range between 15% and 18%, reflecting the Treasury Bill yields on the open market.