- Central Bank drastically reduces interest rates from 130% to 20% to stimulate economic growth
- Shift from ZWL to ZiG currency prompts the significant reduction in benchmark policy rate
- Lower interest rates aim to curb borrowing costs, stabilize stock markets, and promote consumer spending
Harare- Zimbabwe has drastically reduced interest rates from 130% to 20% as stated in the latest Monetary Policy Statement released on April 5, 2024 by the Central Bank.
This decision comes after the central bank had previously raised interest rates to a global record high of 200% in July 2022, before gradually lowering them to 150% and then 130% in an effort to control soaring inflation.
The primary objective of the high interest rates was to discourage speculative borrowing and lending within the economy. However, with the introduction of the new currency, ZiG, which is backed by US$100 million and 2.5 tons of gold (equivalent to US$185 million), the central bank has significantly reduced the benchmark policy rate to 20%.
High market interest rates result in increased borrowing costs, heightened stock market volatility, reduced disposable incomes, and limited growth in aggregate consumer spending.
Therefore, with the launch of the new currency, it was necessary for the authorities to substantially decrease the policy rate.
As long as the growth of the ZiG money supply remains in line with the growth rate of economic activity in the real sector, currency and price volatility will be controlled, leading to lower interest rates that support production.
The bank accommodation interest rate has been set at 5% above the bank policy rate to encourage responsible economic borrowing. Additionally, the minimum interest rates on savings and time deposits for ZiG have been established at 9% and 7.5% respectively, which are below the bank deposit facility rate of 12.5%. The minimum interest rates on foreign currency accounts (FCA) deposits remain unchanged at 1% for savings and 2.5% for time deposits.
These measures have likely been implemented to incentivize depositors to keep their money in long-term savings accounts while earning interest. Attractive interest rates on deposits ensure that surplus funds held by the public are retained in banks rather than being used for speculative purposes.
The higher the deposit interest rate, the greater the opportunity cost of holding non-interest-bearing cash.
However, it is important for these deposit interest rates to exceed the inflation level; otherwise, they are unlikely to attract economic agents to bank their excess ZiG funds.
When interest rates lag behind the inflation rate, the value lost due to rising prices outweighs the value gained from interest on ZiG deposit accounts.
Consequently, in an inflationary environment, the public and investors have no incentive to keep their extra money in such accounts.
Instead, they may choose to invest their free funds in riskier markets like stocks or purchase US dollars on the Parallel Market.
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