RBZ to maintains tight monetary policy

STAFF WRITER
Zimbabwe’s central bank will continue its restrictive monetary policy this year, in an effort to stabilise the local currency, the Zimbabwe Gold (ZiG) which has lost nearly half its value since its introduction 10 months ago.
In an interview with Business Times, a market leader in business, financial and economic reportage, ahead of the 2025 Monetary Policy Statement expected to be unveiled early February, the Reserve Bank of Zimbabwe (RBZ) governor, Dr John Mushayavanhu emphasised that maintaining a tight monetary policy is crucial for controlling inflation and supporting the local currency/
“The forthcoming 2025 Monetary Policy Statement will further contextualise and consolidate these positive prospects, and proffer more fine-tuning policies to move the economy from stability to growth,” Dr Mushayavanhu said.
He also stressed that high interest rates are necessary for curbing inflation and supporting the ZiG.
The central bank raised its key interest rate to 35%, a move designed to mitigate inflationary pressures and restore confidence in the ZiG. Inflation has significantly decreased from a peak of 37.2% in October to 3.7% in December, signaling that the central bank’s strategy was beginning to take effect in that front. The RBZ’s goal is to keep month-on-month inflation within single-digit levels, providing a foundation for future economic growth.
The focus on a tight monetary stance, while necessary for controlling inflation, carries notable economic risks. High interest rates, while effective in curbing inflation, also have a dampening effect on economic activity.
They raise borrowing costs for businesses, thereby reducing investment and consumer spending.
In an economy that is still grappling with the aftermath of years of economic instability, this could slow the pace of recovery, particularly in sectors like agriculture and manufacturing, which rely on affordable credit to expand.
The RBZ’s commitment to maintaining high interest rates reflects its determination to control inflation, but the long-term economic impact remains uncertain.
While the immediate effect may be a reduction in inflationary pressures, the central bank must carefully balance these efforts with the need for broader economic recovery.
The tight monetary policy could exacerbate challenges in accessing credit, particularly for small and medium-sized enterprises (SMEs), which are critical to the country’s economic growth.
Despite these efforts, the ZiG currency continues to face significant challenges. Public trust in the new currency remains low, with most Zimbabweans opting to conduct transactions in US dollars, which are perceived as more stable. Currently, over 90% of all transactions are in foreign currency, highlighting the reluctance of businesses and consumers to adopt the local currency.
The central bank is working to address this issue by increasing the usage of ZiG, both in physical and electronic forms. Digital transactions, processed through the Real Time Gross Settlement (RTGS) system, already account for approximately 40% of total transactions in ZiG. However, the central bank’s push to further integrate the local currency into the economy will require more than just increased digital adoption; it will need to foster greater public confidence in the stability of the currency.
A key initiative introduced by the RBZ is the Targeted Finance Facility (TFF), a special-purpose vehicle designed to channel funding into productive sectors of the economy. The TFF aims to stimulate economic growth by increasing lending to critical industries such as agriculture, manufacturing, and construction. This initiative is viewed as a key mechanism for driving recovery, particularly in sectors that are heavily dependent on access to capital.
The TFF will be financed through the Reserve Bank’s pool of banks’ statutory reserves, rather than through the creation of new money. This approach ensures that the facility does not contribute to inflationary pressures, a key concern given the current high interest rate environment. While the TFF is designed to promote economic growth, its success will depend on the ability of banks to extend credit to the productive sectors and on the overall stability of the financial system.
Zimbabwe’s Treasury has projected a 6% economic growth rate for 2025, driven by a recovery in the agricultural sector and growth in the iron and steel industries. However, the broader economic environment remains fragile. Zimbabwe’s economic recovery is highly contingent on the continued stabilization of the currency, the containment of inflation, and the successful implementation of policies that encourage investment and capital inflows.
The tight monetary policy will likely remain a cornerstone of the RBZ’s approach throughout the year. While the policy is necessary to manage inflation and stabilize the currency, it also risks constraining economic growth by reducing access to affordable credit. Zimbabwe’s policymakers will need to closely monitor the effects of these policies, making adjustments where necessary to ensure that the economy does not slip back into stagnation.
Zimbabwe’s central bank faces a delicate balancing act in 2025. Governor Dr Mushayavanhu’s commitment to a tight monetary policy is aimed at stabilizing the Zimbabwean dollar and controlling inflation.
However, the long-term effectiveness of these policies will depend on their ability to support economic growth without stifling investment. The economic outlook for the year is cautiously optimistic, with a 6% growth forecast, but the road to recovery remains uncertain.
The upcoming Monetary Policy Statement will likely provide further guidance on how the central bank plans to address these challenges and whether the current strategies will be sufficient to achieve sustainable economic growth.
With high interest rates and tight liquidity measures in place, Zimbabwe’s path to stability will require careful management of both monetary and fiscal policies, as well as efforts to rebuild public trust in the local currency.