New MPC resolutions: Inflation deception


ON 28 March 2023 the RBZ reviewed the macroeconomic and financial developments in the economy and their implications on monetary policy, before drawing new resolutions which included the reduction of the Bank policy rate from 150% to 140% per annum, as well as increasing and standardising the trading margins for authorised dealers from the current 5% to 10%, consistent with the margin applicable to bureaux de change and retailers.

In an earlier review of the macroeconomic developments, the RBZ resolved to adopt the blended inflation for official inflation reporting in Zimbabwe, scraping the ZWL based inflation statistic.  The blended inflation encompasses price movements in ZWL and in US$ amid a 70:30 currency mix between foreign currency and local currency. Due to the heavier weight of the US$, the blended statistic tends to be skewed heavily towards price movements in US$.

Since the greenback is a hard currency which is less susceptible to fluctuations, the blended inflation statistic tends to be biased towards stability, undermining the price fluctuations in the ZWL which carries a lesser weight.

In the recent review by the RBZ which resulted in the reduction of the Bank policy, banking on the alleged slow-down in inflation, the authorities are clearly deviating from reality. Prior to the increase in use of foreign currency, rampant inflation in Zimbabwe was positively correlated to money supply and exchange rate depreciation.

When money supply increased, the exchange rate would depreciate in favour of the US$, which led to price adjustments as economic players chased value in real terms. This would then be termed as inflation, and the more rampant the exchange rate loss, the more rampant the inflation levels.

 The introduction of the contractionary monetary policy in the second quarter of 2022 was meant to tighten money supply, and this worked in favour of the RBZ’s drive to curtail inflation and exchange rate loss at the expense of demand in the economy. However, since December, liquidity has been increasing in the economy following the relaxation of the suspension of government contracts payments, along with the easing of borrowing costs.

Borrowings in both local currency and foreign currency has been on a rise. Other tickers that were affected by liquidity tightening, which include the stock market and the exchange rate, have also been on a bull run this year which is reflective of increasing demand from increased money supply.

The ZSE has gone up by almost 100% in nominal terms since the beginning of the year, while the ZWL has depreciated by -28% against the US$ on both the formal and informal currency markets. In 2022, the ZWL depreciated by -27% against the US$ in the first quarter, which is a relative performance to the first quarter of 2023.

In 2022, the depreciation was before the introduction of the contractionary monetary policy, which then insinuates that the economy is back to pre-contractionary monetary policy levels where inflations was at an all-time high speed. However, given the slow-down in inflation according to official statistics this year, at a time all the other tickers are showing an inverse relationship, the only conclusion is to allege that official inflation is heavily biased.

If inflation is understated, interest rates may be kept artificially low, which can encourage borrowing and spending. This can lead to an increase in debt and financial instability if interest rates are not adjusted appropriately. Understating inflation levels can also have an impact on wages and salaries as workers may not receive appropriate cost-of-living adjustments.

Furthermore, inaccurate reporting of inflation can lead to misallocation of resources and investment decisions based on incorrect information. This can ultimately result in economic instability and subsequently recession.

Duma is a financial analyst and accountant at Equity Axis, a leading media and financial research firm in Zimbabwe. — [email protected] or [email protected], Twitter: TWDuma

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