RBZ hikes interest rate to 50%

RBZ hikes interest rate to 50%
Published: 26 June 2019 (192 Views)
THE Reserve Bank of Zimbabwe (RBZ) has increased the interest rate on its overnight window to 50 percent per annum from 15 percent in a bid to tame inflationary pressures alongside other measures meant to buttress the strength of the local currency.

Although the cost of borrowing had dropped to below 15 percent under the US$-dominated multi-currency regime, speculative parallel market behaviour had seen a drastic spike in inflationary pressures as the local RTGS dollar lost value against major currencies.

The country's inflation rate rose to nearly 100 percent year-on-year as at May 2019 and 12,5 percent month-on-month, according to Zimstat, and is suspected to be even higher on the informal platforms. In this regard financial experts had stressed the need to control money supply growth and tame demand-pull inflationary pressures through increasing interest rates, for instance.

This is over and above the need to tighten public expenditure and reducing fiscal deficit, which Treasury is already seized with.

In a public notice yesterday, RBZ Governor, Dr John Mangudya, announced the adjustment, with effect from 24 June 2019, in "the interest rate on the Reserve Bank overnight window upwards from the current 15 percent per annum to 50 percent per annum".

This means as banks borrow from the central bank at the repo-rate of 50 percent interest, they will on-lend to their clients or customers at 50 percent-plus rate. The interest rate is the amount charged, expressed as a percentage of the principal, by a lender to a borrower, typically noted on an annual basis.

However, some market watchers felt the 50 percent interest rate was rather steep and risks frustrating borrowing for productive purposes by companies. Others feared the new lending rate level would be a double-edged sword on account of banks and businesses possibly passing the borrowing burden to end consumers.

Government, though Statutory Instrument 142 of 2019, on Tuesday scrapped the multi-currency system in Zimbabwe and replaced it with the local unit of account, Zimbabwean dollar, for all domestic transacting purposes. The apex bank has swiftly moved in with a cocktail of measures, including the upward review in lending rates, so as to cement the bold monetary reforms.

The Governor also directed banks to transfer to it, all RTGS/ZW$s that they are holding as counterpart funds for the foreign currency historical or legacy debt. Government, through RBZ, will assume these at the rate of 1:1 between RTGS$ and the US$.

"This measure is expected to mop around ZLW$1,2 billion from the market by the end of the week," said Dr Mangudya. Some analysts have argued that this move would leave most banks without money, a situation that will force them to borrow from RBZ at 50 percent interest rate.

Others felt the RBZ should have consulted stakeholders first before announcing the new changes. Moreover, Dr Mangudya said administrative limits on the operations of bureaux de change have been removed on the cap on margins for banks for interbank foreign exchange transactions. The RBZ further put a vesting period of 90 days on disposal of dual listed securities or shares purchased by investors on the Zimbabwe Stock Exchange.

The RBZ pledged to increase supply of foreign currency into the interbank foreign exchange market by ensuring that 50 percent of the surrender of portion of foreign currency is sold to the interbank.

"This will be supplemented by the use of Letters of Credit (LCs) for the importation of essential commodities that include fuel, cooking oil and wheat. The bank has put in place LCs amounting to US$330 million for this purpose," said RBZ.

- chronicle

Tags: RBZ, Interest, Rates,
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