eBusiness Weekly
Kudzanai Sharara
The Reserve Bank of Zimbabwe will continue to pursue supply side policies that seek to increase productivity as it aims to contain inflation, which reached its all-time high since re-basing to 100 in 2012, a senior central bank official said.
Zimbabwe’s consumer goods prices moved up to 4,29 percent in July and the Consumer Price Index (CPI) moved above one hundred at 100,65 for the first time since November 2014.
The significant jump in inflation comes at a time the RBZ is not in a position to use instruments that other central banks across the world use to manage inflation.
Central banks across the globe normally turn to tightening of monetary policies by introducing higher interest rates to reduce consumer and investment spending.
When interest rates are put up, fewer people would want to borrow money because it costs more to do so while that money accrues at a higher interest. So, spending drops, prices drop and inflation slows.
However, the banking sector is currently operating under central bank capped interest rates.
The second tool that is also used is increasing reserve requirements on the amount of money banks are legally required to keep on hand to cover withdrawals. The more money banks are required to hold back, the less they have to lend to consumers. If they have less to lend, consumers will borrow less, which will decrease spending and slows inflation.
However, for Zimbabwe the situation is totally different as interest rates are already high, in fact borrowings are currently low with the spending that is taking place being fuelled by increased Government spending.
In the case of reserve requirements, most banks have since slowed down on lending with some having loan to deposit ratios of less than 50 percent.
The third method is to directly or indirectly reduce the money supply by enacting policies that encourage reduction of the money supply. Such policies are meant to reduce the amount of money in circulation because the money will be going from banks, companies and investors pockets and into the government’s pocket where it can control what happens to it.
One such example is the introduction of the RBZ Savings Bond which pays 7 percent interest and has mopped more than $1 billion from the market.
However, the RBZ, through Governor Dr John Mangudya, says it will continue using supply side policies such as boosting productivity in an effort to maintain lower prices.
“We continue to pursue policies that increase production to ensure that goods are available and that foreign exchange is available to meet the requirement of industry,” said Dr Mangudya in response to Business Weekly.
The central bank has over the years introduced policies that are meant to boost production and the level of success of such policies have been very high.
Some of the sectors that have been recipients of RBZ’s production and export incentives including gold producers and tobacco farmers have since ramped up production to record levels.
According to experts, rising productivity will cause an outward shift of aggregate supply, which will in turn help keep prices low.
Meanwhile, forecasters say year-on-year inflation, which reached 4,29 percent in July is likely going to come off as we head towards the end of the year.
Because of the sharp price increase seen from September last year, but tapered towards year end, the gap measured against 2017’s final quarter is likely to decline to less disturbing year-on-year numbers by October, economist John Robertson said.
Robertson said July inflation was high because of falling prices during the same period last year. From May 2017 through to July of the same year, the inflation rate was falling from 0,7 percent in May to 0,1 percent in July and this has resulted in a widened gap this year as rates trends north.
Prices, however, started increasing from September through to December, that is from 0,8 percent to 3, 5 percent by close of 2017 or 96.8 to 99.5.
This, Robertson say, will see a reduced gap and lower inflation by the last quarter of the year.
Because of the sharp price increase seen from September last year the gap measured against 2017’s final quarter is likely to decline to less disturbing year-on-year numbers by October 2018.
