Governor of the Reserve Bank of Zimbabwe, John Mangudya, speaks during his presentation of the monetary policy in Harare, on October 1, 2018. (Photo by Jekesai NJIKIZANA / AFP)
THE Reserve Bank of Zimbabwe (RBZ) is seen instituting a series of interest rate cuts from 2022 as inflation is expected to remain on a broad downtrend returning to single-digit levels by end 2023.
This is expected to enable the central bank to focus on boosting access to credit, thus stimulating economic activity.
An international research company, Fitch Solutions, in its commentary on Zimbabwe’s policy rate, said the RBZ will keep its key policy rate on hold at 40% over the remainder of 2021 but expects it to turn dovish in 2022.
“While we expect price pressures to moderate in H2021 (second half of 2021) given a slower pace of currency depreciation, inflation will remain elevated, at an annual average of 140.1% in 2021.
However, we do not expect the Reserve Bank to implement a rate hike given still weak economic activity. We forecast that the bank will institute a series of rate cuts from 2022 as inflation continues to moderate and monetary policymaking normalizes,” Fitch noted.
RBZ has kept the rate on hold since a 50 basis point (bps) hike in February 2021, and at its June meeting reiterated its focus on maintaining the current disinflationary trajectory while supporting the “envisaged robust economic growth for 2021 and beyond”.
It thus kept the policy rate on hold at 40% and the interest rate on the Medium Term Accommodation Facility at 30%.
Fitch however said risks to interest rate forecasts are weighted to the upside.
Fitch cautioned that Zimbabwe’s macro-economic fundamentals remain weak and that this could delay a return to normalised monetary policy as the country remains largely cut off international capital markets, and substantial inflationary pressures are possible should the government revert to monetisation of the deficit.
In this eventuality, Fitch said the monetary policy committee would likely raise interest rates again in an effort to reduce the size of the monetary base.
In addition, key inflationary drivers including currency depreciation (notably on the parallel market), and ongoing shortages of US dollars, are seen persisting despite some progress in tackling such issues.
The Zimbabwean dollar depreciated sharply following the abandonment of the ZW$25.00/US$ fixed rate and shift to an auction system in June 2020.
While the auction system has slowed the pace of currency depreciation, low levels of foreign exchange reserves mean that the Zimbabwean dollar is seen continuing to trade at a considerable discount on the parallel market.
“Equally, while the RBZ continues to seek to contain expansion of the monetary base — stating at its June meeting that the reserve money growth target would be reduced from 22.5% to 20.0% per quarter — such expansion will persist given that the government will continue to rely on domestic sources to fund the fiscal deficit. Given these various factors, we expect inflation to average 140.1% in 2021,” noted Fitch.
“However, we do not expect the RBZ to implement a rate hike given the impact that reducing access to credit would have on relatively fragile growth. We forecast that real GDP will expand by 3.3% in 2021 — the fastest rate of expansion since 2018, but a relatively weak recovery given contractions of 8.1% in 2019 and an estimated 8.0% in 2020.”