• Bank Policy Rate remained unchanged at 150%
  • Annual inflation cooled to 18.4%
  • Zimbabwe uses blended inflation to track inflationary trends



Harare- The Reserve Bank of Zimbabwe has maintained the bank policy rate at 150% according to the resolutions of the latest monetary policy committee held on September 26th, 2023. This decision comes even though the year-on-year inflation has decreased to 18.4%, which is below the target of 20% and the month-on-month inflation has transitioned from a deflationary state of -6.2% to 1%.

Despite maintaining a hawkish stance, the decision to keep bank policy rates high, despite a decline in inflation, has sparked curiosity. Normally, interest rates are increased to address inflationary pressures. However, in this instance, as inflation has fallen below target levels, it raises questions about the justification for maintaining elevated rates.

ZIMSTAT' latest data indicates a significant decline in month-on-month inflation. Starting from a peak of 74.5% in June 2023 to -15.3% in July, followed by a further decrease to -1.3% in August 2023, and then to 1% in September 2023. Annual inflation experienced a notable decrease, dropping from a peak of 175.8% in June 2023 to 18.4% in September 2023.

Based on the inflation figures, general prices of goods increased by 18.4% on a yearly basis from September of last year to September 2023, and by 1% on a monthly basis. This implies that a basket of goods that cost 3 dollars last year and 1-dollar last month experienced an increase of only 18.4% and 1%, respectively. However, considering the Zimbabwe dollar depreciated by 30% in May alone, stating that prices fell by 18% from last year does not align.

This suggests that efforts to control inflation are yielding positive results. The expectation is that month-on-month inflation will remain below 3%, indicating a sustained moderation of price levels. Annual inflation is projected below 20% by year-end.

“In light of the positive developments, the MPC resolved to continue with the tight monetary policy stance and to safeguard financial in the economy by maintaining the bank policy rate at 150% per annum and retaining the medium-term accommodation (MBA) lending facility at 75% per annum,” said the Bank in a press statement.

Zimbabwe currently has the highest borrowing rates globally, and these rates are implemented to control lending. When lending is restricted, liquidity in the market is reduced, leading to a scarcity of the local currency and an increased demand for it. Consequently, this helps to curb inflation.

Nevertheless, elevated borrowing rates have negative consequences such as decreased consumer spending and a slowdown in economic activities. A recent illustration of this phenomenon can be observed in the poor performance of British American Tobacco. The company incurred a loss of ZWL6 billion during the first half of June 2023, which is double the ZWL3 billion loss from the previous year. This loss is attributed to the rapid depreciation of the local currency and a shortage of liquidity within the economy bringing in to questioning a sustained elevation of IR. These unfavourable outcomes exemplify the detrimental effects of high borrowing rates. The question at hand is why interest rates remain high when inflation is declining.

To answer the question, ZIMSTAT, the country's statistics agency, utilizes blended inflation figures, which involve tracking inflation in both US dollars and Zimbabwe dollars. The inflation rate is calculated using a blended USD to ZWL rate, with a greater emphasis on the USD. The benchmark rate is specifically for ZWL credit and should be adjusted in accordance with the inflation dynamics of the Zimbabwean dollar.

For instance, if the Zimbabwe dollar remains stable and its annual inflation consistently trends below 50%, the benchmark rate would need to be adjusted downward. This indicates that the reported inflation rate does not accurately reflect the true inflation experienced in Zimbabwean dollars.

The decision to adjust rates in accordance with inflation movement suggests that the central bank is aware that the actual inflation rate in Zimbabwean dollars is significantly higher than 100%. This situation arises from using a blended inflation calculation, where prices are soaring in terms of the Zimbabwean dollar due to the rapid depreciation of the currency, rather than in US dollar terms.

Consequently, tracking inflation in US dollars, which is a stable currency, may not accurately reflect the inflationary pressures experienced in Zimbabwe. This disparity highlights the challenges associated with using a blended inflation approach in a context where the local currency is facing significant depreciation.

ZIMSTAT's approach to calculating inflation figures in blended form manipulates the numbers to present a more favourable picture. It is important for economic indicators to accurately reflect the reality of the situation. Therefore, there is a need to discontinue the use of blended inflation figures as they do not benefit the economy or the general public, but instead serve the purpose of creating the perception of diligent efforts by the regime, even if they are not truly addressing the underlying issues.

In this context, the policy rates set by the central bank are considered to provide a more accurate reflection of the inflation situation.

Achieving stable inflation in Zimbabwe of 18% annually and below 3% remains a significant challenge given exchange rate volatilities, and the nature of failed command economics in the country. Blended inflation massage figures

Zimbabwe's inflation is heavily influenced by exchange rates. Currently, there is a 31% premium between the formal and informal markets, and in August to September, the premium reached 45%. These substantial gaps between market rates highlight the limitations of relying on a blended inflation measure, as it does not accurately reflect the true inflation experienced by the general population.

According to Steve Hanke, a professor of applied economics at Johns Hopkins University, Zimbabwe currently has the highest inflation rate in the world. As of September 14, he measured Zimbabwe's year-on-year inflation rate at 822%. This staggering figure indicates the severity of inflationary pressures and the challenges faced by the country's economy.