Interest rates

“Interest rates rise to push inflation further”

The Reserve Bank of Zimbabwe’s (RBZ) decision to raise the bank’s benchmark rate from 80% to 200% in a bid to stem rising inflation could backfire as it is likely to push the inflation even higher as businesses pass on the high cost of finance to consumers, securities firm Morgan & Co said.

Authorities on Monday announced several measures, including interest rate hikes to achieve price stability in the market, as inflation hit 191.6% in June, the sharpest acceleration in more than 12 months.

In its Economics and Market Intelligence report, the research firm estimated that since most local businesses rely on borrowing for working capital, rising interest rates will hurt more to consumers.

“In the midst of the inflation rate climbing into triple-digit territory, we experienced a period of negative real interest rates which then made borrowing attractive to the general public. The significant increase in the bank’s key rate from 80% to 200% will therefore recalibrate the economy in a temporary state of positive interest rates.

“This can put pressure on companies with high working capital needs, usually financed by short-term borrowing. Additionally, speculative retail borrowing will most likely slow in the meantime, which could also affect equity market liquidity. Additionally, the higher interest charges will likely be passed on to end consumers so businesses can protect their margins,” said Morgan & Co.

The development comes at a time when most central banks around the world are raising interest rates to curb the rising cost of living by limiting the money supply. However, in the case of Zimbabwe, there are many other economic variables at play that push inflation.

In his address to business leaders last Friday, RBZ Governor Dr. John Mangudya said most of the key economic fundamentals were already in place to stabilize both the exchange rate and the movement of the currency. inflation, but the lack of confidence in the local currency was the main inflationary troublemaker. pressures.

“Ours is a problem of perception. We like the US dollar so much that we don’t like our own local currency,” Mangudya said.

“As we meet very soon, in fact tomorrow at the MPC, obviously with inflation where it is, you should expect to find that we are going to raise the key rate. This means that none of you will get money at a lower price because you’re going to speculate.You pushed us this far not because we wanted to, but because we didn’t want to sacrifice stability or growth.

Finance and Economic Development Minister Prof Mthuli Ncube is expected to give revised GDP and inflation figures for the year when he announces the mid-term budget review next month.