Zim annual inflation seen spiking to 105%

OLD Mutual has projected that Zimbabwe’s inflation will close the year at 105%, way above what was anticipated by authorities.

The central bank projected the country’s annual inflation rate to end the year at between 25% and 35%.

Year-on-year inflation for February was 66,1% from 60,6% in January, according to data published by the Zimbabwe National Statistics Agency.

Morgan&Co also estimated that inflation will exceed 100% in 2022.

“Inflationary pressures to persist fuelled by imported inflation trickling down to fuel and food inflation, foreign currency shortages and increased spending.

Food inflation (will be the) main driver. At this rate, inflation will be 105% at year end,” Old Mutual said in its latest report on Zimbabwe.

Old Mutual said the parallel rate mirrored inflation, adding that there was over 100% premium on the parallel rate.

“Continued exchange rate divergence, reduces earnings power, is unsustainable and a deterrent of formal channels,” it said.

The Confederation of Zimbabwe Industries (CZI) said, in its macro-economic briefing note, that there was urgent need to reverse the upward trend in inflation as further delays might see the situation getting worse in the following months.

“The month-on-month inflation linear trend is upward sloping, which is not in line with government’s expectations in inflation containment.

Month-on-month inflation feeds into annual inflation and for the first two months of 2022 average annual inflation is 63,4%,” it said.

“This current trajectory will make it difficult if not impossible for the authorities to achieve the set target of 35% annual inflation by the end of 2022.

Changing the trend requires immediate and not delayed action in the policy correction that will set the path back to the downward trends of 2021.

Without immediate policy correction decisions, it is difficult to see how this trend will retreat on its own.”

To tame inflation, CZI said monetary authorities should maintain a tight money supply control framework and have an effective and efficient foreign exchange market.

CZI said while the Reserve Bank of Zimbabwe (RBZ) should be commended for keeping a tight lid on reserve money growth, the inflationary pressures generally demonstrated that this has not been enough.

“Broad money has been growing at an alarming rate, underlining the need to complement the tight reserve money growth targets with broad money growth targets as well,” it said.

“Although reserve money only increased by 38,26% on an annual basis in December 2021, the growth rates in M1 and M3 of more than 124% and 131%, respectively were not consistent with the need to keep a tab on money supply growth.”

M1 is the money supply that is composed of currency, demand deposits and other liquid deposits which include savings deposits.

M3 on the other hand includes currency, deposits with an agreed maturity of up to two years, deposits redeemable at notice of up to three months and repurchase agreements, money market fund shares or units and debt securities of up to two years.

The CZI said the parallel market was generally used to benchmark prices, hence prices will continue to increase with the increase in the parallel market rate.

It said the participation of business on the parallel market could only cease with the elimination of distortions on the official foreign currency market.

“The foreign currency market is in need of a market platform that allows the discovery of a market determined exchange rate.

While the Dutch Foreign Currency auction has helped as a foreign currency allocation platform, confidence in the auction rate is very low due to the huge parallel market premium,” CZI said.

“The economy needs a reference rate, and this rate can only be determined by market forces rather than legislation.

If these two steps are implemented, the major source of our inflationary pressures, which is fluctuations in the parallel market premium, would be managed.”-newsday