• The Reserve Bank of Zimbabwe last month began to loosen the tight monetary policy it had in place over the last 2 years to act against inflation.
• The hawkish stance of the central bank began to change when the RBZ announced that it would reduce interest rates by 50% to 150%.
• Zimbabwe’s central bank’s hawkish stance has resulted in a weakening economy and rising unemployment.

The Reserve Bank of Zimbabwe held the global record for highest interest rates, reaching a staggering 200%. The central bank has lowered this to 150% on the grounds that the inflationary conditions that required the significant increase have subsided. As is typical with hawkish monetary policy approaches, Zimbabwe’s central bank’s hawkish stance has resulted in a weakening economy and rising unemployment.

On 3 February 2023, the Zimbabwean monetary authorities issued the country’s first Monetary Policy Statement via the central bank. Twice a year, the Reserve Bank of Zimbabwe releases a monetary policy statement that outlines the government’s position on interest rates and money supply.

This statement is always eagerly anticipated since it sets the tone for stakeholders’ economic performance expectations. This is true everywhere on the planet. Zimbabwe is not a special case.

Zimbabwe has taken a hawkish approach against inflation and the variety of other economic headwinds that the southern African nation has been facing long before the rest of the globe responded to the cost-of-living crisis and resulting inflationary pressures.

IMF instruction

In a number of its announcements and analysis on Zimbabwe, the International Monetary Fund (IMF) strongly advocated that the country maintain its resolute stance against inflation. In order to be clear, a central bank’s monetary policy is hawkish when it pushes forcefully to curb inflation.

The characteristics of hawkish monetary policy are typically high interest rates and a shrinking money supply. Such policies are most appropriate when an overheating economy poses a threat of inflation, and as we have seen in recent years, even when inflation is the consequence of cost push factors.

The monetary policy is dovish when it relaxes its stance on high interest rates and the money supply. Dovish monetary policy is also apprehensive of inflation, as well as unemployment and a weakening economy, which are more often than not the result of an excessively hawkish attitude.

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As indicated previously, Zimbabwe’s hawkish posture has been consistent with what the world’s major central banks have done in reaction to rising energy prices and the resulting inflationary pressure. The Federal Reserve and the Bank of England have both increased their respective interest rates.

Why is something important or significant? To comprehend the effect of monetary policy on economic growth, it is essential to comprehend interest rates and their impact on the business cycle and economy. Interest rates are the cost of borrowing or using money.

When interest rates are low or the cost of money is low, entrepreneurs, business people, and industrialists borrow more money to finance their enterprises from banks and other financial institutions. Increasing borrowing boosts both economic activity and the money supply, as borrowing raises the money supply in an economy.

Inflationary pressures

An increase in the money supply causes inflation. That is standard economic theory in its most basic form. A non-obvious consequence of an expansionary monetary policy defined by an expanding money supply and low interest rates is financial market speculation, which can lead to market failures and economic collapse.

For this reason, monetary authorities must constantly monitor economic activity, taking the metaphorical “pulse” of the economy. While a hawkish posture is beneficial in reducing inflation, it may also have unintended consequences.

As a result of rising interest rates, several worldwide economic experts have cautioned that the increased cost of borrowing will inevitably result in decreased economic activity, or, in other words, a recession. A recession technically happens when an economy experiences two consecutive quarters of negative economic growth. When the gross domestic product of a country decreases continuously for six months, the economy is considered to be in recession.

Recession and high unemployment rate are close relatives. Where one is observed, the other is never too far away. It is crucial for central banks to limit this, but doing so requires them to be vigilant in terms of monitoring a country’s economic activities.

Borrowing in USD makes more sense

Prior to the most recent pronouncement on monetary policy, Zimbabwe had the highest interest rates in the world. By lowering interest rates from 200% to 150%, the Central Bank of Zimbabwe looks to be abandoning its aggressive stance.

The interest rate of 150% is still high by international standards, but it sends a clear message to stakeholders in the Zimbabwean economy regarding the direction they anticipate the economy to follow in 2023. Although the fall in interest rates is welcome, it is minor. Companies and individuals will embrace the new policy move, especially if it is followed by other interest rate reductions.

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Businesses and families in Zimbabwe had been singing the blues due to the country’s high interest rates. When the high cost of borrowing had begun to bite, a number of businesses allegedly approached the governor of the central bank, John Mangudya, requesting that he consider decreasing interest rates.

Inadvertently, the high interest rates have encouraged the dollarization of the Zimbabwean economy. This is because families and businesses have determined that borrowing in hard currency or U.S. dollars makes more sense than borrowing in Zimbabwean dollars.

The policy statement goes as follows: “The unintended consequence of high interest rates has been the transition of bona fide borrowers from Zimbabwean dollar-denominated loans to foreign currency loans, resulting in the banks’ loan book being dominated by foreign currency loans. The share of loans denominated in foreign currency climbed from around 37.0% in December 2021 to 64.2% in December 2022.”

According to the RBZ MPS, “The Bank will therefore maintain its existing monetary policy stance in order to consolidate and sustain the current stability, resilience, and growth trajectory benefits, while simultaneously enhancing financial intermediation and limiting speculative borrowing.”

A tight balancing act for the RBZ

The Reserve Bank of Zimbabwe must balance price stability and economic growth on a tightrope. In the words of the central bank, “this Policy Statement outlines steps required to ensure that the monetary policy stance stays sufficiently tight to maintain the existing stability, while preserving the country’s growth prospects and an optimal composition of the dual currency basket.”

The measures are designed to ensure that inflation and exchange rate pressures are effectively contained, while economic activity remains robust.” According to the central bank, Zimbabwe’s economy no longer faces inflationary pressures. The policy paper indicates that the country’s month-to-month inflation rate has decreased to 2.5% from a peak of 30.7% in June 2022. According to the central bank, the exchange rate has stabilized substantially, and the premium on the parallel market will fall below 20% by the end of 2022.

How should investors evaluating Zimbabwe interpret the monetary policy signals from the RBZ? The first factor is that monetary officials believe they have the country’s fundamentals under control.

The central bank feels that the objectives of decreasing inflation and the gap between the official and parallel currency rates have been met. Any seasoned investor would do well to remember that the economic and commercial climate in Zimbabwe is fluid and unstable.

In terms of policy and legislation, nothing remains constant for too long. The southern African nation is in an election year, and its leaders have a history of pursuing populist policies at the expense of economic stability. If the country is able to turn its economic fortunes around, the country’s economic future is bright.