Zimbabwe Central Bank Changes Tack, Halves Key Rate to 35%

(Bloomberg) --

Zimbabwe’s central bank halved its key interest rate to 35%, joining the finance ministry in efforts to revive an economy hobbled by years of mismanagement.

The decision reverses a move by the southern African nation’s newly formed Monetary Policy Committee in September, which raised the rate from 50%. It follows the unveiling last week of the 2020 budget which shows a planned surge in spending for next year.

Read more about Zimbabwe’s 2020 budget

The rate was cut as the MPC “emphasized the need for the bank to put in place measures to fund the productive sectors of the economy by redirecting excess liquidity in the financial system,” Governor John Mangudya said in a statement.

While the moves by the monetary and fiscal authorities seek to boost the economy that’s forecast to contract this year, it could drive up price growth in a nation that a decade ago had to abandon its own currency due to hyperinflation that reached an estimated 500 billion percent. The government dropped a one-to-one peg of its quasi-currency to the dollar in February and later outlawed the use of foreign exchange. Since then, the currency has lost almost 94% of its against the greenback.

The worst regional drought in almost 40 years hit food supplies and left about half of Zimbabwe’s 14 million people without reliable access to enough to eat, further driving up costs.

Despite a spike in the monthly inflation rate to 38.8% in October, the central bank says the outlook for price growth is positive. While the country stopped releasing annual figures in August, the rate is 440%, according to John Robertson, an independent economist in Harare.

“The inflation rate itself says the interest rate should be set a lot higher,” Robertson said. “It’s a whole collection of imbalances and the interest rate is one of them.”

Read more about Zimbabwe’s accelerating monthly inflation

The October inflation increase was “due to shocks caused by mainly adjustments of electricity and fuel prices,” Mangudya said. The energy regulator increased fuel prices for a second time this month on Monday.

The position on interest rates will be reviewed at future MPC meetings, he said. The panel will convene again on Nov. 29.

©2019 Bloomberg L.P.