RBZ tightens monetary policy

Golden Sibanda Senior Business Reporter

The Reserve Bank of Zimbabwe (RBZ) says it will take measures to counter the threat of high and potentially inflationary money supply growth from the 2020 growth-oriented budget by maintaining a stranglehold on reserve money control.

Reserve money is also called central bank money, base money, high-powered money, and sometimes narrow money; essentially it is total money in circulation and with the central bank.

The RBZ indicated that it was targeting money supply growth of 10 percent by the end of this year, but noted money supply growth had already vaulted 80 percent in the eight months to October this year.

The planned measures come against the backdrop of a highly inflationary environment with monthly inflation rate quickening from 17,72 percent in September to 38,75 percent in October 2019, but projected to slow down in November 2019.

Through austerity measures, Government instituted drastic public expenditure rationalisation, including desisting from using the RBZ overdraft window and Treasury Bills to fund significant budget deficits.

For 2019, the Government expects that the austerity measures (fiscal consolidation and revenue enhancements interventions) will allow Treasury to contain public expenditures within the target of 4 percent of Gross Domestic Product (GDP).

In 2020, Government expects to spend $63,6 billion budget, which is where the expansionary fears emanate, and budget deficit to come down to about 1,5 percent of GDP. Zimbabwe has projected expenditure of $26 billion by end of 2019.

But the central bank thinks, after a year of chastening austerity measures that saw inflation bolting out from a lowly 5,39 percent in September last year to 175,6 percent by June 2019, that the 2020 growth oriented budget may fester conditions for higher inflation.

RBZ governor Dr John Mangudya said, after the central bank’s third consecutive meeting of the monetary policy committee meeting on Friday last week, that the MPC had noted the potential expansionary impact of the 2020 National Budget.

“The committee met and deliberated on a number of issues including the potential monetary implications of the 2020 National Budget and the liquidity situation in the economy.

“The committee noted that the 2020 National Budget has a potential expansionary impact on money supply, which limits the scope for tightening of monetary policy as required under the Bank’s disinflation programme.

“In this regard, the Committee directed the Bank to re-calibrate the reserve money targeting framework,” Dr Mangudya said.

The committee noted that the monthly inflation for November 2019 is projected to decline further and therefore resolved to maintain the overnight policy rate at the current level of 35 percent from 70 percent.

Players in the financial services sector, however, said the reduction of the  overnight rates does not mean the bank interest rates were also supposed to follow suit.

Finance and Economic Development Minister Professor Mthuli Ncube’s target to see monthly inflation at 10 percent by December appears a bit ambitious given that the monthly rate will need to drop by more than 20 percent.

Previous efforts to manage money supply growth have entailed sterilising free funds from Treasury Bills maturities to suppress reserve money, which saw idle funds being invested in Government bonds.

The central bank also increased the policy rate; following the introduction of local currency in June, first from 15 to 50 percent, then 70 percent; before the rate was cut down to 35 percent last month.

By using of this monetary policy instrument the RBZ sought to discourage speculative borrowing, which has the effect of increasing inflationary pressures; already under pressure from rising exchange rate.

The committee noted the positive developments following the recent introduction of additional bank notes into the system, which in particular has culminated in significant decline in cash premiums.

The committee also welcomed the progress made towards the re-introduction and refinement of the Reuters System for foreign exchange trading following extensive stakeholder consultation and looks forward to its imminent operationalisation.