Not cutting rates yet, pain is necessary — RBZ

The Reserve Bank of Zimbabwe (RBZ) will not bow to pressure for an immediate downward review of its punitive interest rate regime until it sees inflation on a “durable” decline trajectory, governor Dr John Mangudya said on Wednesday.

Mangudya said the pain induced by the bank’s tight monetary policy regime, which saw the RBZ become the most aggressive central bank in the world in June, was exactly the kind of impact the bank was looking for.

Like medication prescribed to cure an ailment, Mangudya said, the tight monetary stance was expected to have side effects such as the pain the policy thrust has had on industry, commerce and individuals.

In an interview with Business Weekly, he sternly shot down demands for an immediate downward review of the bank’s interest rate policy stance, due to its potential negative impact on the economy.

The central bank supremo noted that advocates for such an undue decision were victims of the policy initiatives instituted by the authorities who have been “burnt” by the interventions.

Mangudya said the objective of the high-interest rate regime was to reduce aggregate demand after authorities noted the level of demand seen in the economy prior to the record interest rate increase was not sustainable.

His remarks come amid shrill calls from various key sectors of the economy, including industry, banking, and agriculture, for the bank to lower its 200 percent bank policy rate, which was hiked from 80 percent previously.

Zimbabwe’s largest industrial lobby, the Confederation of Zimbabwe Industries, noted that while it agreed on the need to curb speculative borrowing, the high-interest rate regime was making funding “operations and new investments unviable”.

Bankers Association of Zimbabwe chief executive, Fanwell Mutogo, said delays in logistics for the financing of the agriculture sector this year could negatively affect preparations for this year’s agricultural season.

“The liquidity situation remains challenging but we are more worried for the farmers as this is the financing period for them and there is a need to quickly come up with a solution as agriculture remains the mainstay of the economy,” Mutogo said.

The RBZ ordered a 12 000 basis point increase in the policy rate on June 27, 2022 taking it to 200 percent after the bank’s monetary policy committee cited a June year-on-year inflation figure of 191,6 percent.

Zimbabwe’s official annual inflation rate had more than tripled since January.

The bank policy rate determines the minimum rate at which the central bank expects commercial banks to peg lending rates, making bank loans punitively expensive.

The policy rate had already risen from 35 percent in early 2021 to 80 percent before the June 27 decision.

The bank’s monetary policy committee “noted that the increase in inflation was undermining consumer demand, due to diminishing purchasing power as well as confidence in citizens.

Inflation in Zimbabwe has largely tracked the depreciation of the domestic currency, which was reintroduced in 2019 after a 10-year hyperinflation-induced hiatus, at $2,5/US$1, but now exchanges at around $850/US$1.

Asked if the record interest hike was justified, Mangudya replied, “Yes, it is a necessary pain. Any policy measure is bound to have side effects just like medication. For policy measures designed to

stabilise the economy, that was to be expected. How can you have a policy that has no side effects?”

“The tight monetary policy stance was designed to reduce aggregate demand. The strong monetary policy stance was adopted after we realised that demand was higher than the economy can carry,” he said.

Against this background, the central bank governor said the monetary authorities were looking to stay the course to ensure inflation continues to come down.

The sentiments dovetail into similar assertions by Finance and Economic Development Minister Professor Mthuli Ncube who hinted that the high-interest rates would be carried over into 2023.

“I think once we see that downtrend in month-on-month inflation being sustainable, maybe over a three- to four-month period, then we can begin to think about lowering interest rates,” Mthuli.

According to the Zimbabwe National Statistics Agency (ZimStat) Zimbabwe’s month-on-month inflation rate in October 2022 came in at 3,2 percent shedding 0,3 percentage points on the September 2022 rate of 3,5 percent, its fourth straight retreat.

August 2022, saw Zimbabwe’s highest year-on-year inflation since February of 2021 at 285 percent, a figure that has since started to retreat, as September 2022 inflation eased to 280, 4 percent followed by 269 percent in October, its second straight decline.

“But for now, the tough monetary-regime stance and the tough fiscal stance stands, that’s what it takes to bring stability and bring things under control,” Mthuli was recently quoted as saying.

And so, Mangudya said, the proportion of those calling for a downward review of interest rates was negligible to that of economic players happy with the stability this has brought about.

“They are outliers, they are trying to manipulate the exchange rate; they have been burnt (by the policy measures… for those ones we are cautious and we are dealing with them,” he said.

The central bank chief said the bank would be assessing dynamics in the market to gauge whether the authorities were achieving the targeted objectives.

He reckoned the exchange rate stability, which has sparked four consecutive months of monthly inflation decline and two straight months of annual inflation retreat, was a result of a combination of both fiscal and monetary interventions.

Mangudya said claims that key productive sectors of the economy were finding it difficult to obtain affordable finance had no merit given the presence of the medium-term bank accommodation facility, pegged at 100 percent.

“We need to balance the equation to say at what time do we need to relax (interest rates)? We are not relaxing the interest rates, for now, we need to ensure stability is durable, we are going to stay the course,” he said.

The central bank chief stressed that no amount of wailing would jerk authorities into taking the immediate and premature decision to reverse the bank policy rate hike at the expense of overall stability for the whole economy.

Apart from internal factors that have driven inflation, including excessive liquidity from banks and payments for Government contracts, Zimbabwe has also suffered from imported inflation.

This has seen central banks across the world raising interest rates to unprecedented levels following record high inflation triggered by high commodity prices, chiefly petroleum oil, fertiliser and grain.

Global prices of key commodities have soared since the war between major suppliers Ukraine and Russia started on February 24, 2022.-ebusinessweekly