The 2021 Monetary Policy Summary
Posted on 22 February, 2021 at 18:01
The Reserve Bank of Zimbabwe (RBZ) governor Dr John
Mangudya last week released the 2021 Monetary Policy Statement (MPS),
indicating the envisaged direction and plans by the government of Zimbabwe for
2021 in as far as the money markets are concerned. The MPS included a raft of
measures meant to maintain what was deemed as price and exchange rate
stability.
Below is the summary of the new measures and the
implications thereon.
1.
Increase of Interest rates
The interest rate
increase has consequences for those looking to save and those with intend to spend
alike. Whether one has a savings account or a bank loan (or both), the move
will likely have an impact. The RBZ increased the Bank policy rate (which is
the interest rate the RBZ charges banks for overnight loans) for overnight
accommodation from 35% to 40% with immediate effect. The medium-term lending
rate for the productive sector was increased to 30% from 25% per annum. The
rate influences how banks and other lenders price certain loans and savings
vehicles and it is likely to trigger an increase in interest rates for
borrowers. It may however come as good news for savers, as some banks may pay
more interest on savings accounts, particularly when they want to lure consumers
to park their money. But most banks haven’t been too generous lately, and
Zimbabweans shouldn’t expect much to change with the latest interest rate
increase.
2.
Increase of Withdrawal Limits
Increasing the cash
withdrawal limits to ZW$2 000 for individuals and maintaining the current
limits on mobile banking transactions at ZW$5000 per transaction and an
aggregate limit of ZW$35 000 per week. This measure will enable the transacting
public to continue conducting small transactions using cash, whilst large
transactions are conducted through electronic banking. The withdrawal ceiling
will however have minimal effect, as the local ZWL currency continues to
depreciate against the US dollar, which in essence has become the substantive
trading currency.
3.
The Auction System is There to Stay
The Central Bank has
indicated that it shall continue refining the foreign exchange auction system
by taking into account market fundamentals as well as closely monitoring use of
funds from the foreign exchange auction system and the economy at large, reads
part of the MPS. What it means is that the foreign exchange auction system
remains the primary platform for exchange rate price discovery. This system has
been widely criticized for having too many loopholes which are being exploited
by individuals for their personal gain, but alas, it seems not to be going
anywhere anytime soon.
4.
Introduction of the $50.00 Bank Note.
Mr Mangudya also
highlighted that the Central Bank shall soon be introducing a ZW$50 banknote to
augment the current stock of banknotes in circulation. The Bank reiterates that
banknotes, new or old, do not cause inflation in an economy since they do not
increase money supply. Cash payments are an alternative to other methods of
transacting and do not constitute money creation. From the public perspective,
this move is likely to not have any real impact in the face of the ongoing
currency depreciation and inflation. To put in more understandable terms, the
Central bank is proposing that the country’s biggest bank note be the
equivalence of US$0.50.
5.
Reduction of Reserve Money
The Central Bank’s
logic is that one of the key drivers of exchange rate and price instability in
our economy has been money supply. In simple terms, they are saying too much
money chasing a few goods results in high inflation, and in some instances, too
much money chasing limited foreign currency results in exchange rate
instability. The Bank has thus moved to reducing the quarterly reserve money
growth from the 25% quarterly target in 2020 to 22.5% per quarter in 2021. The
move is expected to safeguard and maintain the current stability in inflation
and exchange rate in a sustainable manner. It remains to be seen whether or not
1 + 1 = 2.
