Zim’s central bank overhauls lending rates framework as it seeks price and financial stability

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  • Overnight accommodation rate adjusted to 30% from 25%
  • Withdrawal limits also go up
  • The apex bank is targeting below 10% annual inflation by year-end

HARARE – The Reserve Bank of Zimbabwe (RBZ) has increased the overnight accommodation rate from 35% introduced in June 2019 to 40% per annum as part of measures to buttress price and financial system stability.

It increased the medium-term lending rate for the productive sector lending from 25% to 30% per annum.

“The decision on interest rates takes into account the current liquidity conditions in the market and the need to continue controlling speculative borrowing,” RBZ Governor, Dr. John Mangudya said in the 2021 Monetary Policy Statement presented on Thursday.

The overnight rate is the interest rate at which a depository institution (generally banks) lends or borrows funds with another depository institution in the overnight market. In many countries, the overnight rate is the interest rate the central bank sets to target monetary policy. In most circumstances, the overnight rate is the lowest available interest rate, and as such, it is only available to the most creditworthy institutions.

In cases where a country’s economy is overheated and there are signs of rising inflation, central banks often enforce a contractionary monetary policy by increasing the rate. The rate hike discourages banks from excessive overnight lending activities.

Zimbabwe has over the years been battling liquidity issues and following the adoption of multi-currencies in 2009, RBZ saw its jurisdiction as the lender of last resort quickly vanish along with other key monetary policy roles.

Although higher overnight rates lead to a decrease in money circulation in the economy, which prevents inflation, it also discourages business activities.

Meanwhile, RBZ also increased cash withdrawal limits to ZW$2 000 for individuals and maintaining the current limits on mobile banking transactions at ZW$5 000 per transaction and an aggregate limit of ZW$35 000 per week.

“This measure will enable the transacting public to continue conducting small transactions using cash, whilst large transactions are conducted through electronic banking,” said Mangudya.

The apex bank is targeting below 10% annual inflation by year-end, which it aims to achieve by maintaining below 3% month-on-month inflation.

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