• The Reserve Bank of Zimbabwe (RBZ) has maintained its benchmark interest rate at 35% to combat inflation
• The decision aims to stabilize the Zimbabwe Gold (ZiG) and control price pressures
• High statutory reserve ratios limit bank lending, affecting sectors like agriculture, manufacturing, and retail

Harare- The central banking authority, Reserve Bank of Zimbabwe has held interest rate firm at 35% as it continues its gamble to fight inflation head-on.

In its latest Monetary Policy Statement (MPS) following the March 28, 2025, meeting, RBZ Monetary Policy Committee (MPC) has opted to maintain its benchmark interest rate at a steep 35%, despite acknowledging “low aggregate demand” in the economy.

This decision, paired with high statutory reserve ratios that limit bank lending, the RBZ’s focus on stabilising inflation and the Zimbabwe Gold (ZiG) over stimulating immediate economic growth.

Adding to the stakes, the central bank has warned of a sharp rise in annual ZiG inflation when the Zimbabwe National Statistics Agency (ZimStat) releases its first yearly data in April, a looming challenge that highlights the precarious balance the RBZ is attempting to strike in an economy battered by structural weaknesses and currency volatility.

The choice to keep the policy rate at 35%, a level set after a 43% ZiG devaluation in September 2024 pushed it from 20% stands in contrast to the MPC’s recognition of subdued demand.

Low aggregate demand typically signals a need for cheaper credit to jolt business investment and consumer spending, yet the RBZ remains steadfast, prioritising control over price pressures and exchange rate instability, a nod to Zimbabwe’s history of hyperinflation.

High statutory reserve ratios exacerbate this tightness, with banks required to hold 30% of demand and call deposits and 15% of savings and time deposits in reserve, in both ZiG and USD.

This locks up significant liquidity, leaving banks with less to lend to businesses already strained by power outages, forex shortages, and a volatile economic environment.

For firms seeking to expand or even maintain operations, borrowing at 35% or higher, given commercial bank markups, is prohibitively expensive, potentially deepening the demand slump the RBZ itself notes.

The RBZ’s inflation warning further complicates the outlook. While monthly ZiG inflation has eased from 10.5% in January 2025 to a modest 0.1% in March, the bank anticipates a “high” annual figure in April’s debut ZiG data, likely reflecting base effects from the currency’s sharp devaluation in September 2024, when it fell from 13.9 to 24.39 per USD (and later to 26.7 by March 2025).

The RBZ projects annual ZiG inflation to settle below 30% by year-end, banking on its restrictive policy to anchor expectations.

However, this optimism rests on shaky ground: the ZiG has lost 43% of its value since its April 2024 launch, and parallel market rates continue to outpace the official peg, eroding purchasing power, though there was a relief seen lately due to deferred supplier payments by government.

Businesses reliant on local currency transactions such as retailers or manufacturers face rising input costs, while consumers, squeesed by inflation, cut back, reinforcing the weak demand cycle the MPC acknowledges but does little to address.

This tight monetary stance has broader implications for Zimbabwe’s struggling economy. With lending curtailed by high rates and reserve requirements, sectors like agriculture, manufacturing, and retail, key drivers of employment and GDP face a credit crunch.

A farmer seeking to finance equipment or a factory aiming to boost output might find loans scarce or unaffordable, stunting growth at a time when economic activity is already tepid.

The RBZ’s focus on stability aims to prevent a rerun of past currency collapses, but it risks strangling the very businesses that could lift demand.

Historically, aggressive rate hikes like the 200% peak in 2022 tamed runaway inflation but left scars of stagnation.

Today’s 35% rate, while lower, echoes that trade-off, prioritising price control over economic vitality in a context of low consumer and investor confidence.

Regionally, Zimbabwe’s approach contrasts with peers who balance stability with growth. Ghana, facing its own inflation battles, cut its benchmark rate to 21.5% in 2024, easing credit to bolster agriculture and trade while managing a 20% inflation target outpacing Zimbabwe’s tighter grip.

South Africa’s South African Reserve Bank, with a 7.75% rate in 2024, supports manufacturing and services through measured adjustments, leveraging a stable rand to keep borrowing costs manageable. Tanzania’s 14% rate in 2024 fuels agro-processing and infrastructure, balancing inflation (below 5%) with growth.

These nations, while not immune to global pressures, use flexible monetary tools to stimulate demand unlike Zimbabwe, where the RBZ’s 35% rate and high reserves signal a defensive posture that may deepen economic lethargy.

The RBZ’s decision to hold rates high amid weak demand reflects a calculated gamble: sacrifice short-term growth to avert a currency and inflation spiral.

The RBZ walks a tightrope, but with weak demand entrenched and high inflation on the horizon, its margin for manoeuvre is shrinking fast.

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