Monthly inflation during March remained very low at 0,1 percent at the high level of price stability since September last year continued, with the annual inflation rate falling to 87,6 per cent, the Monetary Policy Committee of the Reserve Bank of Zimbabwe announced after its meeting yesterday.
Although inflation is falling, and major falls in the annual rate will be coming through in the next five months as the mid-year spike of last year is dropped from the calculation, the committee only adjusted the bank policy rate, the minimum interest that banks are allowed to charge, marginally cutting it from 150 per cent to 140 per cent.
The high lending rates, peaking at 200 per cent, were part of the basket of measures introduced in the middle of last year to kill the speculative borrowing that was driving the then flourishing black market in foreign currency, measures that succeeded in converting that market to a small affair that largely now functions as a convenience for people wanting to change money outside banking hours with a very small premium.
Interest rates on the medium term bank accommodation facility were also cut marginally from 75 percent to 70 percent, continuing the policy that these should be half the bank rate.
These incorporate some of the lending for capital equipment.
The falling inflation rates could make saving in local currency more attractive as deposit rates move into the positive. Saving interest rates were kept at 30 percent and interest for timed deposits were also maintained at 50 percent.
Bureaux de change, in a further move to kill off the black market and bring almost all currency dealing in foreign currency, have been allowed to increase their trading margin from the currency five percent to 10 percent.
The maximum size of a transaction in this market remains at US$100 000.
“The MPC noted with satisfaction that domestic economic activity remained robust notwithstanding the expected slowdown in global economic growth.
“Domestic inflationary pressures in the economy continued dissipating as a result of fiscal discipline, the tight monetary policy, and enhanced monitoring and enforcement of market discipline by the Financial Intelligent Unit (FIU),” reported the committee.
Gold coins continued to dissipate domestic inflationary pressure, giving those who reluctantly entered the black market seeking to preserve value a legal and better alternative that by cutting money supply removed inflationary pressure instead of fuelling inflation.
By 10 March the Reserve Bank had sold 31 866 gold coins of all sizes, removing $25,8 billion from the pool of local currency.
Inflation is now low. “The MPC noted with satisfaction that month-on-month inflation declined from 0.7 percent in January 2023 to -1.6 percent in February 2023 and 0.1 percent in March 2023. Annual inflation also declined from 101.5 percent in January 2023 to 92.3 percent in February 2023 and further down to 87.6 percent in March 2023 and was expected to continue on the disinflation path owing to the tight monetary policy stance and anticipated bumper harvest which was expected to dampen food prices.”
While inflation figures now combine the inflation in US dollars and inflation in Zimbabwe dollars according to how much each currency is used in transactions, about 70 percent foreign currency at the moment, those figures mean that the local currency inflation must be very low as well as US inflation is positive.
The trend last year for foreign currency to be used in 70 percent of domestic transactions is likely to continue this year, said the committee, considering the good inflows of foreign currency.
Inflows are rising fast and the positive balance over outflows means the pool of foreign currency is growing. “During the period extending from 1 January 2023 to 15 March 2023, the country received US$1.78 billion in foreign currency, representing an increase of 31.5 percent compared to US$1.36 billion in the same period in 2022. This was against payments of US$1.69 billion over the same period.”
Local currency is not being squeezed out. “The local currency also continued to be widely used in the economy as shown by the Real Time Gross Settlement (RTGS) transactions of Z$10.6 trillion in the five months from October 2022 to February 2023, compared to US$7.5 billion worth of transactions settled during the same period.”
To make gold coins easier to use and to smooth out some of the change problems in US dollar transactions, the Reserve Bank is adding to the gold coin market gold-backed digital products and is making available more small denomination US banknotes.
The gold-backed digital products allow gold coins to be more widely traded and so expand tradable assets used to store value in the economy.
Finally, the committee made it clear that any return to wild fluctuations was not going to happen. “The MPC affirmed its commitment to stay the course of the tight monetary policy stance and to cautiously adjust the policy rates in line with positive developments in the economy. In order to enhance the use of the US dollar through formal banking channels, the Bank shall engage banking institutions to address the current high bank charges on foreign currency deposits”.