A HIGHER political risk could push Harare to keep monetary conditions tighter for longer to shore up the currency and prevent inflation from rising again, research firm Fitch Solutions (Fitch) has said.
Authorities have tightened screws on money supply through higher interests, now pegged at 140 percent, and restricted cash circulation while keeping withdrawal limits in check.
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This comes as central banks across the globe are gearing up for a titanic fight against inflation, which has been persistently high in industrialised nations despite recent rises in interest rates that are sometimes swift and subsequent.
Fitch Solutions said Zimbabwe’s policy rate will be at 100 percent by the end of the year owing to a sharper slowdown in price increases
“However, risks to our interest rate forecast for 2023 are significantly skewed to the upside, as higher political risk than expected could urge policymakers to keep monetary conditions tighter for longer to shore up the currency and prevent inflation from rising again,” Jane Morley, sub-Saharan African Risk for Fitch Solutions, said in an email response recently.
“While inflation will keep easing, depreciatory pressures on the Zimbabwean dollar will keep it in triple digits, prompting policymakers to hold. From mid-Q323 onwards, we believe that lower commodity prices and a weaker domestic demand will cause price growth to ease more sharply, opening up room for the central bank to bring the rate to 100 percent by the end of the year.”
The country’s borrowing rates were raised last year to curb speculative borrowing, which the bank said was encouraged by sub-inflationary rates and stockpiling inflation.
The policy rate, which acts as a baseline for interest rates in the economy, was initially raised to 200 percent before being reduced to 150 percent after inflation fell slightly.
Analysts say the country’s interest rates are still too high after the central bank reduced the policy rate from 150 percent to 140 percent.
However, Fitch had projected that the Reserve Bank of Zimbabwe would hold its policy rate at 150 percent until the end of the first half of 2023.
The bank says it will continue to adjust it in line with inflation.
The country’s annual inflation fell by 12,4 percentage points in April to 75,2 percent, compared to 87,6 percent in March, according to the Zimbabwe National Statistics Agency.
This was despite the Zimbabwe dollar’s continued depreciation against major currencies on both the official and parallel markets.
Zimbabwe now measures inflation using a weighted average of items priced in the local unit and US dollars (blended inflation), which some say is not the most appropriate measure.
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