RBZ moves to benchmark interest rates

via RBZ moves to benchmark interest rates – DailyNews Live 29 JANUARY 2014

The Reserve Bank of Zimbabwe (RBZ) has moved to benchmark the country’s interest rates, which it said were distorted and hindering deposits and economic growth.

Acting governor Charity Dhliwayo — expected to present the 2014 monetary policy today — said “the current interest rate structure in Zimbabwe is distorted as evidenced by the wide disparity between deposit and lending rates.”

She said the situation resulted in mixed signals being sent to the market, as reflected by inconsistencies in the pricing of loans and savings deposits.

According to the central bank, currently lending rates quoted by banks range between six percent and 35 percent per annum, with most banks quoting average rates of 20 percent.

On the other hand, interests on deposits range from 0,15 percent for savings accounts to 20 percent on time deposits.

“The wide disparity between rates in the market underscores the need for a properly discernible yield curve to guide the market,” said Dhliwayo.

She said the apex bank proposed indicative yields of 6,6 percent for 91 day instruments, 7,2 percent for 180 day instruments and eight percent for 365 days (one year) instruments “to sanitise the country’s interest rate structure which has curtailed deposit and credit growth”.

This yield curve acts as a guide to the structure of interest rates, especially the Treasury Bill rates.
Since adoption of the multi-currency system in early 2009, the RBZ’s ability to influence interest rates has been limited.

Market experts, however, believe that the structure of interest rates remain a critical ingredient in achieving sustained economic growth.

Interest rates determine the deployment of surplus investable funds to key export and productive sectors of the economy.

In essence, the extent to which credit is extended to productive sectors is inextricably bound to developments on the interest rate front, which in turn determine the affordability of loans.

The RBZ noted that interest rates have a direct bearing on inflation levels since the cost of capital is encapsulated in production costs.

“In turn, the competitiveness of a country’s products, both in the domestic and export markets remain closely related to the evolution of that country’s interest rates.

“Developments on the interest rate front also determine capital flows across international frontiers, as international investors search for favourable returns to their investments,” said Dhliwayo.

The persistently high interest rate regime, in the Zimbabwean economy has ignited debate among various stakeholders on the pricing model being used by banks to come up with the interest rate structure.

Dhliwayo argued that the interest rate structure has turned out to be a doubled edged sword, deterring both borrowers and savers from undertaking transactions in the country’s formal banking system.

“The low deposit rates being offered by banks have conspired with high bank charges to militate against efforts geared at broadening the country’s deposit base, from which productive sectors ordinarily tap into,” she said.

“These adverse developments have resulted in banks largely attracting short term and highly volatile deposits while an estimated $2 billion continue circulating outside the banking system.”

Meanwhile, Dhliwayo — who took over from Gideon Gono — is in her 2014 monetary policy expected to focus on issues relating to the continued instability within the financial sector, banks’ recapitalisation, proposed changes to the Banking Act, and the establishment of a financial ombudsman.

She is also likely to touch on the proposed indigenisation of foreign-owned banks and, most likely, come up with a structure or policy to compel banks to take up Treasury Bills.