The decision by the Reserve Bank of Zimbabwe (RBZ) to raise the Bank Policy Rate to 200 percent from 80 percent in an attempt to tame rising inflation could back-fire as it is likely to push inflation even higher as companies pass on the high cost of finance to consumers, a securities firm, Morgan & Co has said.
Authorities on Monday announced several measures, including interest rate hikes to achieve price stability on the market as inflation reached 191.6 percent in June, the highest acceleration in over 12 months.
In its Economics and Market Intelligence Report, the research firm opined that since most local companies rely on borrowing for working capital, the increase in interest rates will hurt the consumers more.
“Amid the rise of the inflation rate into triple digit territory, we have experienced a period of negative real interest rates which has subsequently made borrowing attractive for the general public. The significant rise in the bank policy rate from 80% to 200% will therefore recalibrate the economy into a temporary state of positive interest rates,”
“This may come as a strain on businesses with high working capital needs usually financed by short-term borrowing. Furthermore, speculative borrowing by individuals will most likely slowdown in the interim, which could also affect stock market liquidity. Additionally, the higher interest costs will likely be passed on to end-consumers so that companies can protect their margins,” said Morgan & Co.
The development comes at a time most Central Banks across the world are increasing interest rates to curb rising cost of living by restricting money supply. However, in Zimbabwe’s case there are many other economic variables at play which are pushing inflation.
In his address to business leaders last Friday, RBZ Governor Dr John Mangudya said most of the key economic fundamentals were already in place to bring stability in both the exchange rate and inflation movement but lack of confidence in the local currency was the chief troublemaker to inflationary pressures.
“Ours is a perception problem. We love the US dollar so much that we fail to appreciate our own local currency,” said Mangudya.
“As we meet very soon, in fact tomorrow at the MPC, obviously with inflation where it is, you should expect to find that we are going to increase the policy rate. What that means is none of you is going to get money at a cheaper price because you are going to speculate. You have been pushing us this far not because we want to do it but because we don’t want to sacrifice stability or growth.”
Finance and Economic Development Minister, Prof Mthuli Ncube is expected to give revised GDP and inflation figures for the year when he announces the Mid-Term Budget review next month.
