RBZ adjusts rate to support forex auction system

RBZ adjusts rate to support forex auction system

The Reserve Bank of Zimbabwe (RBZ) on Tuesday restored the bank policy rate to 35 percent as part of measures to curb speculative borrowing and support the smooth functioning and sustainability of the foreign exchange auction system.

Generally, a bank policy rate is the rate used by central banks to implement or signal its monetary policy stance or preferred interest rate level, which guides the market. It is most commonly set by the central banks’ policy-making committees.

Zimbabwe’s policy rate was halved from 70 percent to 35 percent in November last year, and was cut in two further steps this year to 15 percent, partly to reduce the costs of those needing to borrow to cope with economic chwallenges arising from travel restrictions and the lockdown imposed to limit risk of infection of Covid-19.

However, with inflation rates still high, and with special schemes announced at lower interest rates for those most affected by lockdown provisions, the RBZ’s Monetary Policy Committee has restored the 35 percent pertaining at the beginning of the year.

The black market in foreign currency was being furled by speculative behaviour, including influxes of borrowed funds.

The rise in general interest rates can be seen as part of the series of measures taken to starve the black market of liquidity, measures that include severe restrictions on large anonymous transactions made through mobile money transfer systems.

But the rise still keeps the policy rate below that of the later months of last year, even though inflation has been higher in recent weeks. With the dropping of the old interbank system for setting exchange rates in favour of more open and transparent auctions, the RBZ wants to eliminate new distortions being introduced by speculators through cheap borrowing.

RBZ Governor Dr John Mangudya said the latest intervention was part of broad measures to stabilise and protect the Zimbabwe dollar.

“In order to curb speculative borrowing, the MPC resolved to increase the Bank Policy rate from the current 15 percent to 35 percent, with effect from July 1, 2020. The (bank policy) rate will be reviewed from time to time as dictated by prevailing market fundamentals.

“The MPC policy measures taken are envisaged to support the smooth functioning and sustainability of the Foreign Exchange Auction System and stabilisation of the exchange rate and inflation rate,” Dr Mangudya said on Tuesday.

Confederation of Zimbabwe Industries (CZI) president Joseph Gunda recently emphasised the need for authorities to maintain money supply growth or market liquidity within thresholds only sufficient to sustain optimal economic activity to help protect the value of the local currency. ~HERALD