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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.

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