Andrew
Business Reporter
The Zimbabwe monetary landscape has been going through two damaging trends for several years now. One such trend is high inflation levels that have eroded wages and salaries for many Zimbabweans.
The other is a depreciating local currency that has had the same effect as inflation. That is the erosion of wages and salaries for individuals.
What erosion of wages and salaries basically means is that if the increase in prices of goods and services is higher than the increase in wages and salaries, then individuals would not be able to afford the same things that they bought a year ago (in terms of annual inflation) and what they could buy a month ago (in terms of month-on-month)?
At the last count, annual inflation for October stood at 54,49 percent up from 51,5 percent for the month of September.
The month-on-month inflation for October stood at 6,4 percent, the highest since August 2020.
If wages and salaries were not adjusted in line with inflation, then the purchasing power of individuals was reduced. In other words, one would now buy less than they previously did.
In terms of a depreciating local currency officially the Zimbabwe dollar has depreciated from 82 to the greenback at the beginning of the year to 97 to the greenback currently. The depreciation is, however, worse on the parallel market where the dollar is trading at anything between 160 and 180 to the US dollar.
Whether we use the official or parallel market exchange rate, the impact is the same. The depreciation of the Zimbabwe dollar results in the erosion of the purchasing power of wages and salaries.
Inflation and depreciation of a currency is usually a monetary problem. It means there is too much money chasing a few goods and services. In Zimbabwe’s case too much money is also chasing foreign currency, leading to currency depreciation.
For some time, the RBZ did not see high inflation and a depreciating local currency as a monetary phenomenon. They saw it as a behavioural issue including indiscipline, speculation and lack of confidence.
But through the latest Monetary Policy Committee (MPC) resolutions, the RBZ seem to have admitted that the price and exchange rate instability the economy is facing are monetary.
In response to rising inflation and currency depreciation the MPC resolved to increase the bank policy rate from 40 percent to 60 percent and the Medium Term Bank Accommodation (MBA) Facility interest rate from 30 percent to 40 percent with immediate effect.
The measure is expected to result in positive real interest rates which is critical to foster savings in the economy, the RBZ said.
The MPC also resolved to further tighten reserve money by reducing the quarterly growth in reserve money targets from 20 percent to 10 percent for the fourth quarter of 2021 and the first two quarters of 2022.
The other measure is to increase minimum deposit rates for local currency savings and time deposits from 5 percent and 10 percent per annum to 7,5 percent and 20 percent, respectively, with a view to promoting the appeal of the Zimbabwe dollar as an investment currency.
Impact on personal finance
Raising interest rates makes it more expensive to borrow and typically cools off economic activity and price increases, which helps tame inflation.
Depending on the loan one acquired whether on fixed interest rate or variable interest rate will determine the impact of the interest rate hike on one’s personal finances.
Most loans in Zimbabwe have variable interest rates, so banks are likely to adjust most existing loans. The latest interest rate increase is most likely to influence the cost of loans and credit with variable interest rates, such as variable-rate mortgages and most lines of credit.
While fixed rates stay the same for the duration of the loan term, variable rates fluctuate according to a benchmark set by the central bank, which, in turn, usually moves up or down based on the movement of the RBZ’s key rate.
If rates rise, you’ll be saddled with higher interest costs. In short, your current loan or future loan is going to be expensive than before.
If you already have a variable interest rate loan, it’s a good idea to recalculate instalments using various rate-hike scenarios to ensure you are budgeting for the anticipated increases.
On the positive side, your bank deposits can now earn a little bit more after they were adjusted from 5 percent and 10 percent per annum to 7,5 percent and 20 percent, respectively.
However, this is still considerably below inflation. Real interest rates are thus still negative given exchange rate and inflation outlook.
Bongani Ndlovu
Online Reporter