RBZ raises interest rates, issues short-term bonds in inflation fight

Zimbabwe currency
(REUTERS/Philimon Bulawayo)

The Monetary Policy Committee (MPC) has raised the main policy rate from 15% to 35% and introduced new short term bonds, in a fresh bid to curb rising inflation.

However, rates remain negative, relative to annual inflation of 785.55% in May.

“In order to curb speculative borrowing, the MPC resolved to increase the Bank Policy rate from the current 15% to 35%, with effect from 1 July 2020. The rate will be reviewed from time to time as dictated by prevailing market fundamentals,” the MPC said.

The MPC cut the rate to 15% from 25% on May 1. The rate was at 35% in February. Critics have said the negative interest rates feed speculative borrowing in the market.

Last week, the Confederation of Zimbabwe Industries (CZI) recommended that central bank “consider signalling to the market that the intention of the Reserve Bank is to move to a positive interest rate environment by the end of 2020”.

In February, RBZ governor John Mangudya said he was cautious about raising rates, despite the gap between lending rates and inflation.

“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,” Mangudya said.

OMO plan

The MPC announced the introduction of Open Market Operations (OMO) instruments, which will be indexed to the exchange rate to preserve value.

Under Open Market Operations, a central bank buys or sells securities on the open market in order to manage liquidity. A person with excess Zimbabwe Dollars is able to buy these OMO instruments. OMOs have been used by central bank before to fight inflation, with little impact.

The OMO will be paid in the Zimbabwe dollar and it will be linked to the exchange rate, determined by the weekly forex auction. It will earn interest of 5% per annum, with maturity varying from 30 days to 360 days.

The bond will be attractive to holders of large amount of US dollars who are keen to hedge against inflation. However, it may stretch the RBZ’s capacity to repay them, especially if the exchange rate depreciates steeply. At the formal market, the Zimbabwe dollar fell to Z$63.7 against the US dollar on Tuesday, down from Z$57.3:1 at the first auction last week.

The MPC had indicated, at its 22 May meeting, that RBZ needed to introduce OMO “to deal with any identi­fied excess liquidity balances in the market”.