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Reserve Bank of Zimbabwe governor John Mangudya. Picture: REUTERS/PHILIMON BULAWAYO
Reserve Bank of Zimbabwe governor John Mangudya. Picture: REUTERS/PHILIMON BULAWAYO

Zimbabwe’s central bank raised interest rates to a record and the government officially reintroduced the US dollar as legal currency to rein in surging inflation and stabilise the nation’s tumbling exchange rate.

The monetary policy committee more than doubled the key rate to 200% from 80%, governor John Mangudya said in a statement on Monday. That brings the cumulative increase in 2022 to 14,000 basis points — the most globally.

“The monetary policy committee expressed great concern on the recent rise in inflation,” Mangudya said.

“The committee noted that the increase in inflation was undermining consumer demand and confidence and that, if not controlled, it would reverse the significant economic gains achieved over the past two years.”

Central bankers globally have been unleashing what may prove to be the most aggressive tightening of monetary policy since the 1980s to contain runaway inflation, prevent capital outflows and currency weakness as investors hunt for higher yields. 

Zimbabwe’s annual inflation rate jumped to 192% in June, the highest level in more than a year, as food costs more than tripled. The increase in prices has been spurred by a sharp depreciation in the Zimbabwe dollar, which has lost more than two-thirds of its value against the dollar in 2022 and is Africa’s worst-performing currency.

Finance minister Mthuli Ncube said on Monday that the government will for the second time in more than a decade legalise the use of the dollar. 

“Government has clearly stated its intention of maintaining a multicurrency system based on dual use of the US dollar and the Zimbabwe dollar,” Ncube told reporters in Harare. “To eliminate speculation and arbitrage based on this issue, the government has decided to embed the multicurrency system and the continued use of the US dollar into law for a period of five years.”

Among other steps announced by the central bank are an increase in deposit rates to 40% from 12.5% and the introduction of gold coins to provide an alternative store of value. The coins, to be minted by the state-owned Fidelity Gold Refineries, will be sold to the public through banking channels, Mangudya said, without providing more details.

Source: BLOOMBERG
Source: BLOOMBERG

Plans are also being developed by the central bank to introduce forward-pricing of the currency, Mangudya said. Details will be announced later.

The measures announced on Monday are the latest attempt to deal with a currency crisis that stretches back to 2009, when the Zimbabwe dollar was abandoned in favour of the US currency after a bout of hyperinflation. The Zimbabwe dollar was reintroduced in 2019 and immediately began to weaken.

Previous attempts to stop the currency’s collapse have included a 10-day ban on bank lending, restrictions on trades on the Zimbabwe Stock Exchange, allowing companies to pay taxes in the local unit and introducing a new interbank rate at which most commerce will take place.

OK Zimbabwe, the country’s biggest retailer, said in annual results released last week that the operating environment “remains challenging with high inflation levels and exchange rate volatility”.

“It is unlikely that higher interest rates will curb Zimbabwe’s high inflation rate,” Jee-A van der Linde, an economist at Oxford Economics, said in an emailed note.

“The current economic situation is creating a very challenging business environment and living conditions are expected to worsen over the near term.”

Bloomberg. More stories like this are available on bloomberg.com

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