eBusiness Weekly
Business Writer
After focusing on reserve money supply growth since the launch of the foreign currency auction system in June 2020, the Monetary Policy Committee (MPC) of the Reserve Bank of Zimbabwe (RBZ) has now resolved to monitor developments on broad money to minimise its possible destabilising effects on inflation and the exchange rate.
Following the launch of foreign currency auction system, the RBZ adopted a monetary targeting framework that was meant to restrict the level of money supply in the economy.
Too much liquidity in the economy was seen as one of the main destabilising effect on the exchange rate and inflation. Inflation reached a peak of 837 percent in July 2020 while the official exchange rate was at a huge discount to the widely used parallel market rate.
In an effort to stabilise prices, the central bank put in place a quarterly growth in reserve money target at 25 percent per quarter.
While inflation slowed down to 50,2 percent in August, the exchange rate remained volatile with the premium between the parallel market rate and the official exchange rate at approximately 100 percent.
In reaction, the central bank reduced the quarterly reserve money growth from the 25 percent quarterly target to 22,5 percent per quarter. However, the exchange rate remained volatile while inflation showed signs of creeping up moving from a recent low of 50,2 percent in August to 58,4 percent in November.
In reaction, the central bank further reduced the quarterly reserve money growth from the 22,5 percent quarterly target to 10 percent for the fourth quarter of 2021 and the first two quarters of 2022.
While reserve money growth was being restricted, Broad Money (M3) has gone up over 100 percent driven by banks’ creation of credit.
Broad money stood at $364,60 billion in September 2021, compared to $153,84 billion in September 2020. This was an annual growth of 137 percent. The 137 percent annual growth in broad money largely reflected increases of 363,28 percent in net claims on Government, public non-financial corporations, 270,45 percent, and credit to private sector, 225,86 percent.
While analysts have been pointing to Broad money supply as another source of exchange rate and price instability, authorities have been adamant that only reserve money needed to be kept in check. Not anymore, according to the latest Monetary Policy Committee statement released by RBZ governor Dr John Mangudya.
“In view of the significant increase in total bank deposits during the past year, the Committee also resolved to monitor developments on broad money to minimise its possible destabilising effects on inflation and the exchange rate,” reads part of the statement.
This is the first time that authorities have noted increased Broad Money Supply as a possible source of exchange rate and price instability.
Meanwhile, the central bank has maintained its main policy rate at 60 percent expressing satisfaction that the previous monetary policy decisions had helped “to stabilise the exchange rate and domestic prices”.
The MPC said the recent monetary policy measures had reversed the upward trend on month-on-month inflation, which rose from 4,2 percent in August 2021 to 6,4 percent in October 2021 and decelerated to 5.76 percent in November 2021.
The Committee noted that the country was on course to attaining a positive economic growth trajectory of 7.8 percent in 2021 and 5.5 percent in 2022 as projected by Government.
In light of the obtaining macroeconomic stability, the Committee resolved to maintain the existing monetary policy stance with the Bank policy rate remaining at 60 percent while the Medium Term Bank Accommodation (MBA) Facility interest rate was also kept at 40 percent.
The Committee also maintained statutory reserve requirements for demand/call deposits at 10 percent and at 2,5 percent for savings and times deposits.
Minimum deposit rates for ZW$ savings and time deposits were kept at 10 percent and 20 percent, respectively with a view to sustaining the appeal of the ZW$ as an investment currency.
