‘Long-term interest rates won’t spike’

The Chronicle

Tawanda Musarurwa, Harare Bureau

Zimbabwe’s fiscal and monetary authorities say the removal of the cap on banks’ lending rates will only affect short-term borrowings while long term borrowers, especially corporates, remain insulated.

The central bank’s interest rate policy plays a key role in the formulation of effective monetary policy market interventions and impact on an economy insofar as interest rates are determinant of the cost of capital.

A fortnight ago, the central bank adjusted the interest rate on its overnight window upwards from the circa 15 percent per annum to 50 percent per annum. This was meant to discourage borrowing for speculative activities on the parallel foreign exchange market, which was driving price volatility.

Secretary in the Ministry of Finance and Economic Development George Guvamatanga, said the development will not have an impact on long-term borrowers such as firms.

“What we are reviewing are short-term interest rates. Long-term interest rates are not likely to spike,” he said.

Previously the RBZ had pegged the interest rate at 12 percent, and had limited flexibility in interest rate management due to the multi-currency system that was in place.

However, with the year-on-year inflation rate rising to near 100 percent as at the end of May, and much as the low interest rates were threatening to put financial institutions out of business, they also encouraged speculative borrowing.

Finance and Economic Development Minister Mthuli Ncube told Parliament’s Budget and Finance Committee this week that the adjustment to 50 percent was a fine balancing act and that there was possibility for further reviews in the near future.

“Even at 50 percent we still have negative interest rate. When we were debating whether it should be 50 percent or 40 percent or 100 percent, we settled at 50 percent.

“What we were balancing was perhaps not just basing things on the year-on-year inflation but also on the month-on-month inflation. The month-on-month inflation was on 12,5 percent and the year-on-year is closer to a 100 percent and we were trying to strike a balance to where it was headed on a month-on-month basis, and we thought 50 percent was just about right,” he said.

“We stand ready to move the interest rate either up or down as we see fit in order to make sure that we stabilise things in the economy.”

What also necessitated the interest rate increase was a rise in speculative behaviour by some companies.

“It was to deal with speculation that we had spotted in the market. I know of one specific case of a company that was now borrowing RTGS dollars then using the borrowings to take positions in US dollars and placing that money into its FCA, and then starting all over again. Why? Because we had a large negative real interest rate,” said the Finance Minister.

Although high interest rates on a long-term basis are considered to have a negative impact on an economy, analysts also expect local banks to utilise their know-your-customer (KYC) information to offer genuine corporate customers low interest rates. The increase in interest rates is also expected to have a positive impact on interest on deposits, with low rates a long-standing problem in the local banking sector.

Said RBZ governor Dr John Mangudya: “The fact that our overnight accommodation window is now at 50 percent does not mean that banks have to borrow 100 percent of their requirement from the central bank. It’s only marginal to cover up for what they are not able to do.

“What this says to us is that banks should be able to provide interest to their depositors, perhaps up to 20 percent or 30 percent so that they can retain depositors’ fund.”