Zimbabwe will keep world’s highest interest rate of 200% into next year as it priorities economic stability ahead of high economic growth rate, according to the Minister
By Clemence Mupfunya
The central bank of Zimbabwe, the Reserve bank of Zimbabwe (RBZ) is tasked with maintaining a certain level of stability within the country’s financial sector. Specific tools are afforded the RBZ that allow for changes to broad monetary policies intended to implement the government planned monetary and fiscal policies.
These include the management and oversight of the production and distribution of the nation’s currency, the promotion of economic and employment growth through the implementation of changes to the discount rate and the sharing of information and statistics with the public.
The most influential economic tool the central bank has under its control is the ability to increase or decrease the discount rate. Shifts in this crucial interest rate have drastic effects on the building blocks of macroeconomics such as consumer spending and borrowing.
Zimbabwe will keep world’s highest interest rate of 200% into next year as it priorities economic stability ahead of high economic growth rates, said finance Minister Prof Mthuli Ncube.
What does this imply to ordinary citizen? The monetary authority said in a statement that it had more than doubled the rate to try and contain inflation, which has been further aggravated by the war in Ukraine.
Annual inflation has more than doubled in two months to 19% in June fueling fear of a return to hyperinflation that has wrecked the country’s economy.
The reserve bank of Zimbabwe ordered a 12000 basis point increase in the interest rate in June taking it to 200%.
Changes in interest rates can have both merits and demerits effects on the markets.
Central banks often change their target interest rates in response to economic activities raising rates when the economy is overly strong and lowering rates when the economy is sluggish.
In Zimbabwe RBZ is responsible for setting the target interest rate at which banks borrow and lend money to one another and this has a ripple effects across the entire economy.
It usually takes time for change in this interest rate to have a widespread economic impact but the stock market’s response to a change is often more immediate.
Interest rate set by RBZ affects borrowing costs for government, businesses and households. They are monetary policy’s primary tools for ensuring maximum employment and modest inflation and among the most important determinants of the pace of economic activity.
Below are some of the effects of maintaining high interest rate on the economy.
This action taken by RBZ will continue to make borrowing more expensive. Interest payments on credit cards and loans will be more expensive.
Therefore, as a result this will discourage people from borrowing and spending. Individuals who already have loans will continue to have less disposable incomes because they spend more on interest payments. Therefore reducing their income purchasing power.
Mortgage interest payment will be high. Interest in payments on variable mortgages will increase. This will have a significant impact on consumer spending.
This is because a 0,5% increase in interest rates can increase the cost of a bond note 100 000 mortgage by 60 bond per month.
This is a significant impact on personal discretionary income.
In addition, government debt interest payment high be high. The Zimbabwean government is paying its debts from difference institutions within and outside the country. Higher interest rates increase the cost of government interest payments. This could lead to higher taxes in the future.
Reduced confidence. Interest rates affect consumers and business confidence. A rise in interest rates discourages investments. It makes investors and consumers less willing to take out risky investments and purchases.
Therefore, higher interest rates will tend to reduce consumer spending and investment spending. This will lead to a downtown movement in aggregate demand. Lower aggregate demand will tend to cause lower economic growth (recession).
It can also lead to higher unemployment if output falls, firms will produce fewer goods and therefore firms will hire fewer workers.
Higher interest rates affects people in different ways the effects of higher interest does not affect each consumer equally.
Those consumers with large mortgages often will be disproportionately affected by rising interest rates. In order to reduce inflation as RBZ is saying it requires that interest rates should be raised to a level that causes real hardships to those with large mortgages.
In other hand, those with savings may actually be better off.
This makes monetary policy less effective as a macroeconomic tool.
Real interest rates. It is worth bearing in mind that the real interest rate is most important. The real interest rate is nominal interest rates minus inflation.
Thus, if interest rates rose for example from 6% to 7% but inflation increased from 3% to 6.9%. This actually represents a cut in real interest rates from 3% (6-3) to 0, 9% (7-6,9).
Thus from this example the rise in nominal interest rates actually represents expansionary monetary policy.
It is important to note that the central bank of a nation is not solely responsible for fluctuating interest rates. There are certain events that could lead to such fluctuations such as geopolitical events, natural calamities and economic crisis.
But one might ask the impact of informal economy on the interest rate. Zimbabwe’s economy is higher characterised by informal sectors does this action by RBZ of maintaining high-interest rate in such an economy works.
The whole ideal of reducing inflation through increase in interest rate is to reduce expenditure from households, firms and government.
This move, consumers in the short-run will have to contain the higher cost of saving debt on personal loans, credit cards, car finance, housing mortgages but in the long-run it will benefit the economy to experience low inflation. So households need to lower access of credits or loans because that what fuel expenditure.
Economist Clemence Mupfunya is a correspondent for The Sunday Express. He writes in his personal capacity. Contact him at (27) 67 208 2236.
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