FBC sees backlash in RBZ hawkish stance

Source: FBC sees backlash in RBZ hawkish stance – NewsDay Zimbabwe

BY SHAME MAKOSHORI
RESERVE Bank of Zimbabwe (RBZ) governor John Mangudya faced rare criticism for his tough inflation containment strategy at the weekend, as FBC Securities warned of grave consequences, including stunted growth for the country.

Following a difficult year in which corrective measures failed to rein in surging inflation and prices the RBZ chief raved up his hawkish monetary policy stance in a mid-term monetary policy statement (MPS) on Thursday, as he maintained targets to push quarterly reserve money growth to zero percent.

The strategy has already precipitated subdued spending, with serious knock on effects of business and economic growth.

But Mangudya gained fresh impetus to fight the inflation rage after regimes announced by authorities about three months ago helped him cut excess reserves — Zimbabwe dollar bank balances — to 0,34% in June this year, from 55,06% 12 months earlier.

The huge drop largely reflected tighter liquidity conditions stemming out of the central bank’s aggressive mop up operations, which have been bolstered by last month’s release of more than US$3 million worth of gold coins.

The action has briefly dealt a blow to Zimbabwe’s influential black market kingpins — the driving force behind a gruelling economic crisis.

For now, however, authorities’ ad hoc interventions have struggled to keep rioting inflation at bay.

The annual inflation rate surged to 256% in July, from 191% a month earlier — the highest such rate on the continent.

The annual inflation rate was estimated at 131% in May, which translates to a 125 percentage point gain in three months.

It was huge pushback against President Emmerson Mnangagwa’s personal intervention three months ago to save a faltering economy.

But in an analysis of the MPS released at the weekend, researchers at FBC Securities appeared to caution that the RBZ had been so preoccupied with the war on inflation and exchange rate fragilities, downplaying other repercussions of conservative monetary targeting.

“The bank (RBZ) has maintained its tight monetary stance to control inflationary and exchange rate pressures emanating from global and domestic shocks, with the quarterly reserve money growth target being revised to 0%,” FBC said in its eight page paper.

“While maintaining a tight monetary stance may be key in achieving inflation and exchange rate stability, tight monetary policies are likely to restrict economic growth as liquidity is essential in driving growth and investment spending. Inflation targeting and exchange rate stability are the primary economic objectives but achieving these and a favourable gross domestic product growth target is mutually exclusive,” the paper said.

“While the measures introduced by government and the mopping up of excess liquidity appears to be bearing fruits, restrictive government policies and a tight monetary stance are ultimately not conducive for economic growth and investment spending. Local inflation has remained elevated since the beginning of the year. Inflationary pressures have been partly driven by external factors such as the Russia-Ukraine war which has impacted import prices of raw materials, food and liquid fuels. Domestically, adverse inflation expectations and exchange rate depreciation have also been major drivers of inflation,” FBC noted in its report, which also analysed developments at the foreign currency auction system.

“Introduction of the willing buyer willing seller foreign exchange trade mechanism has alleviated some pressure off the main auction, evidenced by a reduction in the average number of bids from 2 000 bids per week to 1 450 bids per week. To enhance confidence, the bank has cleared some backlog, and is in the process of settling the ring-fenced backlog amounting to US$169 million. While these are positive developments, the country still faces significant foreign currency shortages with many market players failing to access adequate currency for their operations,” the paper added.