The Reserve Bank of Zimbabwe has raised interest rates for local banks from 15 to 50 percent as it seeks to “sterilize” excess liquidity of RTGS dollars on the market that was used to fuel exchange rate pressures.
The move means local banks will charge in excess of 50 percent per annum once they put their mark-up when lending and this is expected to weaken appetite on borrowing for speculative purposes.
In a public notice released yesterday, the Central Bank chief, Dr John Mangudya said, “The interest rate on the Reserve Bank overnight window has gone upwards from the current 15 percent per annum to 50 percent per annum,”
According to monetary authorities, there has been an upward trend in bank lending lately, using the prescribed 15 percent rate which was rather conservative, and this was creating sufficient liquidity to put demand pressure on USD currency on the parallel market, hence influencing the exchange rate.
Ultimately, this was leading to inflation.
The interest rate hike follows Government’s decision to deregulate the multi-currency system and is one major intervention so far taken to bring currency stability.
“When now you have your own currency you need to activate your monetary policy, so one of the monetary policy instruments is the interest rate policy which the RBZ is using to influence the direction of the economy,” economic analyst, Percy Gwanyanya told 263Chat Business in an interview.
“If you increase the bank rate, it increases the rate at which the banks access money from the Central bank, so you are dealing with speculative borrowing. What was happening is people were approaching banks borrowing to trade in foreign currency then use the profits from the sale of foreign currency to extinguish their debts at the banks that was not productive but speculative. So this is meant to curtail these activities,” he added.
Recently, Minister Mthuli Ncube alleged one big corporate of sponsoring agents with RTGS dollars to buy USD currency on the parallel.
With the country now in single currency mode, analysts say the economy has been buoyed by Central bank’s monetary policy autonomy that should help it guide the market on course.
“We are likely to see increased use of interest rate policy going forward. We need to balance the virtues of demand management policy and supply side interventions, and so what the country needed to deal with was the demand side of the economy, which was driving the prices. We will then talk about the increased production after we have stabilized; this is a period for stabilization, so demand management policies are the best stabilizing tools,” added Gwanyanya.
However some experts have warned of the re-emergence of Non-performing loans in the banking sector and most worryingly for productive sectors of the economy who are currently struggling to capitalize.
“This will take a toll on those who want to borrow for production, the cost is generally too high and we notice that there is high risk of Non-Performing Loans on the banking sector as was in the early to mid- stages of the multi-currency system because most borrowers might face challenges in repaying these debts,” said Pepukai Chivore an economist.