• RBZ has maintained its benchmark interest rate to ensure the stability of ZiG
  • The statutory reserve requirement ratios were left unchanged
  • Foreign currency statutory reserve ratios for demand and savings/time deposits were maintained at 20% and 5%

Harare- The Reserve Bank of Zimbabwe, the nation's central banking authority, has elected to maintain the benchmark interest rate at its current level for the third consecutive period, as evidenced by the latest policy statement issued by the institution.

The bank's policy rate was left unmodified at 20% per annum, with an interest rate corridor spanning 11% to 25%.

As stated by the Bank, "The Monetary Policy Committee has resolved to preserve the existing restrictive monetary policy posture in order to ensure the continuity of the present state of stability."

Furthermore, the statutory reserve requirement ratios were left unchanged, with demand deposits and savings/time deposits in the Zimbabwe Gold requiring 15% and 5% in reserves, respectively.

Similarly, the foreign currency statutory reserve ratios for demand and savings/time deposits were maintained at 20% and 5% correspondingly.

These reserve requirement figures suggest the central bank remains focused on managing domestic and foreign currency liquidity within the banking system, in an effort to buttress the stability of the nation's new gold-backed currency.

The decision by the RBZ to maintain the current benchmark interest rate levels comes after the stabilization measures implemented by the institution since the beginning of April 2024.

These measures have resulted in a month-over-month ZiG inflation rate of -2.4% in May 2024, with the inflation rate expected to hover around 0% in June 2024 due to declines in both food and non-food price indices.

As stated by the central bank, "Inflationary pressures will remain subdued in the outlook period, with projected inflation anticipated to end the year below 5% as the exchange rate remains stable."

This indicates the ZiG has successfully stabilized both inflationary dynamics and exchange rate volatility within the formal market.

Since inception, the ZiG exchange-traded instrument experienced a 0.7% week-over-week decline during the last week of April, a 0.7% decline in May, and a 1% decline in June, resulting in cumulative losses of less than 3% over the three-month period.

The inflation rate has been able to stabilize despite the local currency depreciating by at least 33% on the parallel/black market exchange rate.

The ZiG is a gold-backed instrument, so its price volatility is primarily driven by fluctuations in the global gold market. Gold prices have trended upward since the onset of the Russia-Ukraine conflict in 2022, the Israel-Hamas military confrontation, and the advent of El Niño-induced droughts.

These macroeconomic factors have helped the ZiG maintain relative stability in the formal/official exchange market since its launch, though the currency has exhibited elements of managed float/pegged exchange rate dynamics.

Implications:

RBZ’s decision to hold its policy interest rate steady at 20% for the third consecutive period under the new ZiG currency framework signals its commitment to establishing the credibility and acceptability of the gold-backed Zimbabwe Gold. By maintaining a tight monetary policy posture, the central bank aims to entrench low inflationary pressures and a stable foreign exchange rate, which are crucial for promoting confidence in the new currency and supporting broader economic recovery in Zimbabwe.

The policies implemented thus far appear to have been effective in driving this macroeconomic stability.

However, the central bank will need to remain vigilant and prepared to adjust its policy stance if the inflation and exchange rate outlook changes significantly. Continued policy consistency and transparency will be essential for the RBZ to solidify the position of the Zimbabwe Gold as a viable gold-backed currency instrument.

Supplementary measures, though not abruptly implemented, need to be taken to ensure fiscal prudence, convertibility of the currency, and its nationwide adoption, especially for fuel purchases and various tax obligations that should also be payable in the local unit. These complementary actions will further bolster confidence in the ZiG and facilitate its effective integration into the domestic and regional financial system.

RBZ should also continue to maintain fiscal discipline, not overextending its commitments beyond its means. It should persist in living within its budgetary constraints, ensuring that the supply of ZiG currency in circulation is directly proportional to the level of reserves held by the central bank. This disciplined approach will help to avoid episodes of excessive money creation, which typically trigger hyperinflationary spirals.

Thus far, the accommodative monetary policy stance taken by the Central Bank appears to have been worthwhile, as it has contributed to the stabilization of inflation and the ZiG exchange rate. Sustaining this prudent policy approach, while complementing it with measures to ensure fiscal responsibility and the appropriate backing of the currency, will be crucial for solidifying confidence in the Zimbabwe Gold as a viable gold-backed legal tender.

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