Tawanda Musarurwa Senior Business Reporter
The Reserve Bank of Zimbabwe (RBZ) has increased the interest rate on its overnight window to 70 percent per annum from 50 percent as it continues its bid to calm inflationary pressures.
Earlier in June, the central bank increased the overnight window rate to 50 percent from 15 percent.
The bank rate (or discount rate) — the rate of interest which a central bank charges on its loans and advances to commercial banks — is expected to continue guiding interest rates in the financial services market, after removal of a long-standing 12 percent interest cap, which had become unsustainable.
“Overnight bank rate will provide forward guidance on the major macroeconomic indicators, including the desired and expected path of interest rates, exchange rates and inflation. In this regard, the bank’s rate for overnight borrowing has been revised upwards from 50 percent to 70 percent to take account of developments on inflation and the exchange rate,” said RBZ governor Dr John Mangudya in the 2019 Mid-term Monetary Policy Statement released yesterday.
The authorities expect the latest interest rate hike to help the fight against rising inflation.
“The Bank expects inflation to start declining after the current high inflation cycle ends, as attested by ebbing exchange rate depreciation pressures, following the removal of the multi-currency system,” said the governor.
Prior to the initial increase in the overnight window rate, players in the local financial services were complaining that they were lending at negative real interest rates, which was threatening to put them out of business.
There are concerns that the interest rate spike may function to moderate economic growth as private companies struggle to access new loans or repay old ones.
Said analysts at IH Securities in their 2019 Zimbabwe Banking Sector paper:
“Prior to the introduction of the local currency and the overnight window by the central bank, most banks have indicated the intention to increase lending to export oriented businesses.
“However, with the RBZ adjustment of the overnight window upwards from 15 percent to 50 percent per annum in line with inflation trends, this will likely result in depressed demand for lines of credit,” said the analysts.
“We anticipate loan book growth to significantly decline as consumers and the productive sectors will not be able to service debt at current elevated interest rates given that they are operating in an already depressed economic environment.”
“We are naturally concerned about a potential spike in non-performing loans (NPLs).”
However, in July, Finance and Economic Development Minister Professor Mthuli Ncube, however, said the increase in the overnight lending rate by the apex bank is a temporary measure meant to deal decisively with inflation and speculative behaviour that had become rampant in the economy.
“This is temporary, it will last a few months
and then after that you will begin to see the interest rate go down because we are also acutely aware
that high interest rates for an extended period of
time will be negative for the economy, so this is a temporary measure,” said the Treasury boss at the time.
“We needed to deal with speculation that we had spotted in the market. I know one specific case of a company that was borrowing domestic RTGS dollars and using the borrowings to take possession of US dollars, put that into an FCA account and then start all over again that is what they were doing.”