RBZ raises interest rate by 20%, introduces short-term bonds

By Wellington Zimbowa
IN its efforts to curb the rising inflation, the Reserve Bank of Zimbabwe has raised the main interest rate from 15 percent to 35 percent and issued short term bonds, through its Monetary Policy Committee (MPC).
Just recently, the central bank introduced the forex exchange auction trade platform, introduced stringent requirements for mobile money platforms, and targeted individual and organisations publishing or circulating parallel market (black market) rates, in a desperate bid to bring down the black market, seen as the main source of the skyrocketing inflation.
The MPC said: “In order to curb speculative borrowing, the MPC resolved to increase the Bank Policy rate from the current 15% to 35%, with effect from 1 July 2020. The rate will be reviewed from time to time as dictated by prevailing market fundamentals.”
On May 1, 2020, the MPC reduced the rate to 15% from 25%, while the rate stood at 35% in February, although observers note that the rates remain in the negative, thereby fuelling speculative borrowing in the market.
In the world of finance, speculation, or speculative trading, refers to the act of conducting a financial transaction that has a substantial risk of losing value but also holds the expectation of a significant gain or other major value, according to an investment online platform, www.investopedia.com.
The RBZ has been on the cautious side, in as far as raising rates is concerned, despite the widening gap between lending rates and inflation.
Through the MPC, the RBZ is banking on Open Market Operations (OMO) instruments that will be indexed to the exchange rate to preserve value.
The MPC also announced the introduction of Open Market Operations (OMO) instruments, which will be indexed to the exchange rate to preserve value, although this scheme is not new to the central banks’ intervention methods, which have at times proved fruitless.
Through this initiative, RBZ will seek to manage liquidity through buying or selling securities on the open market and anyone with excess Zimbabwe Dollars can buy these OMO instruments. Linked to the exchange rate, these OMOs will be paid in Zimbabwe dollar currency, and determined by the weekly forex auction, earning a 5% annum interest, while maturing between 30 to 60 days.
RBZ’s move may attract those with large amounts of the greenback, but scepticism remains on the central bank’s capacity to honour its pledge in the event of sharp exchange rate depreciation.

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