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Zimbabwe’s central bank raised interest rates to a record high; The government officially re-established the US dollar as a legal tender to curb rising inflation and stabilize the country’s declining exchange rate.
The monetary policy committee has more than doubled the key rate from 80% to 200%, Governor John Mangudya said in a statement Monday. That brings the cumulative increase this year to 14,000 basis points, the most worldwide.
“The Monetary Policy Committee expressed deep concern about the recent rise in inflation,” Mangudya said. “The committee noted that the rise in inflation undermined demand and consumer confidence and, if left unchecked, would reverse the significant economic gains made over the past two years.”
Central bankers worldwide have unleashed possibly the most aggressive monetary policy tightening since the 1980s to contain runaway inflation and prevent capital outflows and currency weakness as investors chase higher yields.
Zimbabwe’s annual inflation rate rose 192% in June, its highest level in over a year, as food costs tripled. The price increase has been prompted by a sharp depreciation of the Zimbabwe dollar, which has lost over two-thirds of its value against the dollar this year and is Africa’s worst-performing currency.
Treasury Secretary Mthuli Ncube said Monday that the government would legalize the use of the US dollar for the second time in more than a decade.
“The government has clearly expressed its intention to maintain a multi-currency system based on the dual use of the US dollar and the Zimbabwean dollar,” Ncube told reporters in Harare’s capital. “To eliminate speculation and arbitration based on this issue, the government has decided to enshrine the multi-currency system and continued use of the US dollar in law for five years.”
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Other steps announced by the central bank include increasing the deposit rate from 12.5% ​​to 40% and introducing gold coins to provide an alternative store of value. The coins, minted by state-owned Fidelity Gold Refineries Ltd., will be sold to the public through banking channels, Mangudya said, without providing more details.
The central bank is also developing plans to introduce forward prices for the currency, Mangudya said. Details will be announced later.
Read: Zimbabwe to allow the use of US dollar in the economy for next five years
The measures announced Monday are the latest attempt to deal with a currency crisis dating back to 2009 when the US currency replaced the Zimbabwe dollar after a period of hyperinflation. The Zimbabwe dollar was reintroduced in 2019 and immediately began to weaken.
Past efforts to halt the currency’s collapse have included a 10-day ban on bank loans, restrictions on transactions on the Zimbabwe Stock Exchange, allowing businesses to pay taxes in the local unit, and introducing a new interbank—Rate at which most traders will take place.
OK Zimbabwe Ltd., the country’s largest retailer, said in its full-year results released last week that the business environment “remains challenging with high levels of inflation and exchange rate volatility.”
“Higher interest rates are unlikely to curb high inflation in Zimbabwe,” Jee-A van der Linde, an economist at Oxford Economics, said in an emailed note. “The current economic situation creates a very challenging business environment, and living conditions are expected to deteriorate soon.”
(Updates with comments from companies and analysts in the penultimate paragraph)
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