RBZ’s 30% interest rate still too high’

LIVINGSTONE MARUFU

The Reserve Bank of Zimbabwe’s (RBZ) decision to lower the bank policy rate from 35% to 30% remains insufficient to stimulate meaningful borrowing and wider adoption of the Zimbabwe Gold (ZiG) currency, arguing that lending costs are still excessively high in an economy where annual inflation stands at just 4.4%, economists have said.

They said the revised rate is still prohibitive for businesses and households seeking credit in local currency. Instead of encouraging the use of ZiG, they contend, the high cost of borrowing continues to reinforce dollarisation and undermine confidence in the domestic currency.

Economist Moses Chundu described the reduction as positive but said a deeper cut was warranted.

“Given sustained single-digit inflation, one would have expected a much lower rate, closer to single digits, especially on the targeted facility rate which affects industry. The reluctance to let go of interest rate points towards lack of confidence in the sustainability of the single-digit inflation rate given Zimbabwe’s history of inflation,” Chundu said.

Another economist Vincent Musewe said the adjustment was too small to materially change borrowing patterns.

“Thirty percent is still too high. Companies have not been borrowing at 35% and I doubt a five percentage-point reduction makes much difference,” Musewe said.

Former MPC member Eddie Cross was more critical, arguing that policy inconsistencies had eroded confidence in the ZiG.

“What the Monetary Policy Committee (MPC) is doing with the local currency is absolutely impossible to understand because it has no real market value since it is not being traded properly. If it were freely traded, its true value would emerge and people would not hesitate to use it as a medium of exchange or store of value.

“With inflation at around 4% and interest rates at 30%, what kind of world are they living in? In most countries there is no such huge disparity between inflation and interest rates,” Cross said.

However, another economist, Malone Gwadu, defended the central bank’s cautious approach, saying the move demonstrated that authorities were responding to concerns from industry.

“It shows that the central bank is listening to industry concerns regarding the cost of credit, which has been a persistent issue. The anti-inflation measures and efforts to contain exchange-rate volatility relied on tight liquidity and deterrent interest rates.

“Now that inflation is largely under control and the gap between the official and parallel exchange rates is within internationally acceptable thresholds, policy can gradually shift from stability towards sustainable growth.

“The reduction from 35% to 30%, and from 20% to 15% on targeted facilities, is a step in the right direction, but it must be done cautiously to avoid reversing the gains already achieved,” Gwadu said.

Enock Rukarwa, another economist, also welcomed the move but said its impact would likely be limited because the economy remains predominantly dollarised.

“This is a vote of confidence by the authorities regarding developments in the exchange rate and inflation. However, in practical terms, the impact will be minimal because the bulk of the economy is transacting in US dollars.

“For civil servants and a few formally employed individuals with ZiG-denominated loans, this provides some relief, although not significantly. Since formal sector workers are the main beneficiaries of bank lending, the reduction should slightly improve disposable incomes and support liquidity creation,” Rukarwa said.

He added that the policy adjustment largely reflects improvements in exchange-rate stability and inflation trends but stressed that the economy still needs to demonstrate that these gains are sustainable over a longer period.