eBusiness Weekly
Tawanda Musarurwa
The Reserve Bank of Zimbabwe has effectively removed the 12 percent cap on interest rates after increasing the rate on its overnight window to 50 percent per annum from 15 percent.
A bank rate (or discount rate) is the rate of interest which a central bank charges on its loans and advances to a commercial bank.
A higher bank rate typically translates to higher lending rates by the banks, and in order to curb liquidity, the central bank can resort to raising the bank rate and vice versa.
The removal of the 12 percent interest rate cap comes after fiscal authorities this week moved to scrap the long-standing multi-currency system in a huge step towards full currency reform, which gives the apex bank some flexibility in conducting monetary policy.
Finance and Economic Development Minister Mthuli Ncube said a monetary policy committee will now be set up as the central bank strengthens its monetary policy role, which had been eroded by implementation of the multi-currency system.
“We also expect the creation of a monetary policy committee to act as part of the micro-institution that goes to stabilising the value of our currency,” he said.
“We expect better targeting of monetary balances in the form of high powered money, which we actually announced that, that is what we intend to do going forward as an approach to managing our monetary reforms.”
Through Statutory Instrument 142 of 2019, the Ministry of Finance and Economic Development outlawed the use of selected currencies as legal tender for local transactions and specified the ‘Zimbabwe dollar’ as the sole trading currency.
Interest rate policy is a key subset of monetary policy.
Economist Takunda Mugaga says full monetary policy can help the RBZ stabilise the economy.
“What seems to be the problem at the moment is we have seen a half-baked monetary policy where there was over-reliance on just managing the exchange rate without looking at the interest rates.
“But due to negative monetary policy where we saw interest rates below inflation, there was always an incentive to try and trade in the RTGS dollar by going back into the black market to buy the US dollar,” he said.
All things being equal interest rates can change rapidly and reflect the economic situation in the country, and interest rate policy changes tend to have a direct impact on operating costs and investments of companies and financial institutions.
In 2017, the RBZ’s Monetary Policy introduced a ceiling of 12 percent per annum on lending rates.
Prior to that (in 2015) the central bank agreed with banks to cap interest rates at 18 percent, as banks were charging interest rates as high as 35 percent per annum, excluding default rates of equal or higher threshold
But local banks have long been lobbying the central bank to remove the cap.
Official figures show that the interest rate in Zimbabwe averaged 12,19 percent from 2011 until 2018, reaching an all-time high of 16,04 percent in March of 2012 and a record low of 8,86 percent in September of 2017.
