The Reserve Bank of Zimbabwe (RBZ) has chosen to maintain the overnight accommodation rate at 35 percent, in a move aimed at sustaining the stability that has been entrenched by the foreign currency auction system.
The apex bank has kept the medium-term lending rate for the productive sector at 25 percent.
The overnight accommodation rate is the interest rate at which banks lend or borrow funds with another depository institution in the overnight market.
Typically, the rate is set by central bank to target monetary policy. In most circumstances, the overnight rate is the lowest available interest rate, and as such a high rate discourages borrowing by making the money expensive.
The current 35 percent interest rate — which business views as rather steep — was set in June this year.
Earlier in the year, business called on the country’s monetary authorities to revise the interest rate from the current 35 percent to 20 percent to help economic players cope with the effects of Covid-19.
“Interest rates must be lowered to 20 percent from 35 percent and loans must be restructured so as to allow businesses to recover,” said the Zimbabwe National Chamber of Commerce (ZNCC) in April.
The monetary authorities this week said the present interest rates will contribute the sustenance of stability that has already been achieved in the economy since the establishment of the foreign currency auction
This year alone, the interest rate was reduced from 35 percent to 15 percent earlier in April after businesses made representations to the apex bank to reduce the bank rate to circa 20 percent following the advent of Covid-19.
But a rise in speculative borrowing has forced the central bank to backtrack on the earlier policy shift, increasing the rate to 35 percent in June.
“The MPC (Monetary Policy Committee) resolved to put the following measures to buttress price and financial system stability in order to foster the country’s economic recovery process: Maintaining a status quo on both the policy rate for overnight accommodation at 35 percent and the medium-term lending rate for the productive-sector lending at 25 percent,” said RBZ governor Dr Mangudya in a statement this week.
“This decision on interest rates takes into account of the current tight liquidity conditions in the market and the need to continue controlling speculative borrowing.”
The move is part of broader plans to implement a contractionary monetary policy.
The latest RBZ reserve money update shows that banking sector deposits at the apex bank declined by $780,03 million, while required reserves and currency issued increased slightly, resulting in reserve money falling by $698,26 million, to $14,29 billion over the week ending October 2, 2020.
Experts say higher interest rates can work to weaken inflationary pressures and cause an appreciation in the foreign currency exchange rate.
Zimbabwe’s Dutch auction-determined foreign currency exchange currently stands at 81,34, basically unmoved from last week.
The central bank has been constantly tinkering with the interest rates to deal with varying prevailing economic situations.
Last June Zimbabwe’s monetary authorities hiked the overnight accommodation rate from 15 percent to 50 percent and then to 70 percent in September in a move to discourage speculative borrowing and protect the value of the Zimbabwe dollar following its floating on the interbank market for the first time since 2009.
Then in November the central bank reduced the bank rate from 70 percent to 35 percent as part of its efforts to promote lending to productive sectors, before reducing it to 15 percent due to the pandemic.
Meanwhile, Dr Mangudya has indicated that the apex bank has increased funding to productive sectors of the economy, specifically to the tune of $2,5 billion under the bank’s medium-term lending facility to support the productive sectors and promote economic recovery.
“The funds will be accessed by final beneficiaries through normal banking channels under an arrangement that is consistent with the conservative monetary targeting framework being pursued by the bank,” said the governor.
“Accordingly, banks are encouraged to ensure that repayments by their customers from the existing financing facilities are used to augment the bank’s medium-term financing window.”