Zimbabwe’s banking sector is now drifting close to real interest rates, once we look at annualised inflation rates derived from recent monthly rates, with the falling monthly inflation and the decision by the Reserve Bank of Zimbabwe to maintain its policy rate at 40 percent.
The Monetary Policy Committee recommended retaining the 40 percent as the Reserve Bank’s accommodation rate. Technically this is just a tool used by the Reserve Bank to encourage banks to ensure they keep a reasonable level of liquidity so they can cope with the odd daily skewing of cash flowing through the RTGS system.
But in fact it is used by all commercial banks when they set their own interest rates and so is one of the major indicators used by the Reserve Bank to manage stability in the economy. We need to remember that the Reserve Bank raised it from 35 percent to 40 percent in February, six months after the introduction of the auctions had brought exchange rate stability and seen month-on-month inflation slashed to the low single figures.
The setting of the 40 percent was to start setting a rate that had some contact with reality and to pass a message, that banks needed to be thinking when they set interest rates in a stable economy, or at least a stabilising economy. While it was below the annualised inflation rate of the average of the previous six months of monthly inflation, which was then just over 50 percent, so the rate was not deflationary, it was not so far below that annualised rate as to open taps to indisciplined lending.
That admittedly did not stop some auction bidders working with their banks to borrow most of the money they wanted for their bids, something that would push up the prices of whatever they were importing or using imports to produce. So at that stage Reserve Bank governor Dr John Mangudya had to yet again sigh deeply as he gazed on indiscipline and push through yet another rule, that at least half the cash used for a bid had to come from the bidder’s pockets, not from the bank.
An interest rate above the annualised monthly inflation rate would, in theory, have achieved the same result, but since so many in Zimbabwean business are dubious about pure economic theory, probably not. But distinctly positive interest rates would have hit more businesses, especially during a Covid-19 set back, and in the end stifled recovery and growth.
Part of the problem facing the wise people on the Monetary Policy Committee is the unevenness of the inflationary pressure. For some time, after the stability achieved by the auctions was embedded around August last year, the weekly variations in the exchange rate were below the variations recorded when ZimStat checked the prices and generated the monthly inflation figures.
In effect, the market reckoned the US dollar was a little overvalued and was willing to use monthly inflation to bring its value down, in real terms, very gently and with minimal disruption. For the past few months this is not so obvious. While the weekly average bid price, the official rate, has been rising very slowly and steadily, it is not quite tracking what we find out a few weeks later was the monthly inflation rate, but it is so close that it seems the market is working rather well and two quite different processes are close to alignment.
So the text books are largely right that markets will mirror reality so long as manipulators are kept at bay and half the job of any central bank is to figure out how to keep the cowboys off their horses and in Zimbabwe that still means direct action is sometimes needed, rather than just adjusting things like interest rates.
The other interesting point from the Monetary Policy Committee were the inflation predictions. The prediction that annual inflation, which has already fallen dramatically to 106,6 percent last month will crash to around 55 percent this month was a no brainer. Lopping off that 35 percent jump in prices we saw in July last year at the peak and end of that exponential rise, will bring the annual rate roughly into line with the annualised average monthly rate we have seen since then.
Another far more modest but still significant fall will be seen next month, when those transitional price rises in August last year disappear from the calculation. At that point the annual inflation rate will start meaning something useful, giving an indication of what is happening in the real economy rather than what was happening before the major monetary policy decision to set a market-related exchange rate through the weekly currency auctions.
By recent standards an annual rate close to 50 percent is rather good news, and this is what, annualised, we have been seeing over the last 10 months. That stability from September will finally be reflected in the number that so many enclose in a monstrance on the altar and regard as the final word, although the major discontinuity in the graph has made that number fairly useless over the past 10 months.
An annual inflation rate is a useful tool, when there is something close to a continuous function, to remove all the spikes and dips in average monthly price rises and get a trend line and something that can be used for planning at micro and macro levels. A business manager working on cash flow budgets can use that sort of rate as one of the factors to take into account, for example.
But even more interesting in many ways was the policy committee’s prediction that the annual rate would almost halve again to reach around 25 percent by the end of this year. That implies the average month-on-month rise in the cost of living has to be a little under 2 percent.
While month-on-month inflation has tended to be lower in the first six months of this year than in the last four months of last year after stability was achieved in exchange rates, it has only dropped below 2 percent in April, when it fell right down to 1,58 percent.
The prediction by the Monetary Policy Committee thus implies something very close to totally stable prices for the rest of this year and the 2,54 percent in May and the 3,9 percent in June being a small anomalous blip on the graph. The predictions need to take into account global economic recovery as vaccination programmes, especially in the developed world, help to reverse the Covid-19 drops.
But when looking at the sort of products that ZimStat uses in its calculations, and the weights they carry, the prediction makes more sense.
For a start, a lot more of Zimbabwean food prices are fixed for some time to come at the harvest prices paid to farmers. This is one advantage of growing your own food.
While farmers are not being cheated, simply not having to pay for foreign storage costs and shipping means that those prices will at least not be rising. Even edible oils, where we are not nearly self-sufficient yet, are likely to be more stable not just because of modest falls in global prices, but because we have produced quite a lot of our own, even if it is not enough, so prices can be stable at least for several months.
With the high percentage food plays in our cost-of-living formulas, that stability will be critical and, because food prices play such an important part in perceptions as well, there will be a general perception of high levels of stability. Coupling that with a stable exchange rate, or one that is almost stable, then the policy committee does not look like a bunch of happy campers making a wild guess.
Exchange rates should be fairly stable with the growth in exports and the sharp reduction in food imports. The extra cash the Government needs to buy vaccines can easily come out of the savings it will be making on not having to feed large numbers of people with imported food.
The Reserve Bank is moving down the targets for growth in money supply, from 22,5 percent to 20 percent, and with a conservative interest rate policy that seems achievable. Generally the RBZ and its Monetary Policy Committee, along of course with the Government and its budget surpluses, seem to be placing a high premium on correctness and stability, a vast change over the first 18 years of independence.
Of course, going back to interest rates, the monetary authorities are going to have an interesting set of calculations to do once annual inflation falls below 40 percent and real interest rates go positive again.
It is unlikely anyone is going to take them negative, considering the need to build up Zimbabwe’s savings levels, something that does really require positive rates, but the interesting question will be just how positive. Expect conservatism.