Bank rate to be introduced as market guide

Tawanda Musarurwa
Senior Business Reporter

The Reserve Bank of Zimbabwe is set to introduce a bank rate, which will guide interest rates in the market, it has been learnt.

A bank rate (or discount rate) is the rate of interest that a central bank charges on its loans and advances to a commercial bank.

It normally gives a cue to the market of the prescribed interest rates.

All things being equal, a higher bank rate will translate to higher lending rates by the banks.

RBZ Governor Dr John Mangudya indicated last week that bank rate will be used as a monetary policy instrument to control liquidity in the market.

“Once we establish the accommodation window, we shall come up with something called the bank rate. The bank rate will then determine the rates in the market; that’s how things are going to operate,” he said.

The move comes as local banks have complained that the set  interest rate of 12 percent had been overtaken by inflation, and was making it difficult for them to lend.

The country’s annual rate of inflation rose to 56, 9 percent last month from 42 percent in December 2018.

“We have this mismatch when you have negative real interest rates and yet when we lend we are supposed to lend in terms of positive interest rates. So in an ideal world, we should be lending above the inflation rate, but if we do that everybody would be out of business.

“The bank’s viability is affected by the negative real interest rates and that is a major challenge that the banking sector is facing,” said Agribank chief executive Sam Malaba said recently.

The ceiling of 12 percent per annum on lending rates was introduced in 2017.

Prior to that, in 2015, the central bank agreed with banks to cap interest rates at 18 percent, as banks were charging interest rates as high as 35 percent per annum, excluding default rates of equal or higher threshold.

Official figures show that the interest rate in Zimbabwe averaged 12,2 percent from 2011 until 2018, reaching an all-time high of 16,04 percent in March 2012 and a record low of 8,9 percent in September 2017.

The demonitisation of the Zimbabwe dollar in 2009 made it impossible for the RBZ to use monetary policy instruments such as the bank rate to influence the market.