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Money market yields to remain strained

Tawanda Musarurwa

Zimbabwe’s money markets could continue to under-perform going forward as authorities keep a tight leash on interest rates.

Due to sub-inflation interest rates, money market assets in the country have generally lost value over time.

Just last week, the Reserve Bank of Zimbabwe (RBZ) announced that it was maintaining the bank policy and medium-term lending rates at 35 and 25 percent, respectively.

The bank policy rate currently stands at 35 percent, after it more than doubled from 15 percent in October 2019.

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The policy rate or overnight accommodation rate had earlier been increased from 15 percent to 50 percent in June and 70 percent in October 2019, before the rate was cut down to 35 percent.

The interest rate (amount of interest due per period, as a proportion of the amount lent, deposited or borrowed) is a critical economic component insofar as it has an impact — either positive or negative — on the cost of borrowing and return on savings.

It is also significant with regard to the total return on numerous investments.

But with latest official statistics showing that the country’s annual inflation closed at 401,66 percent in November 2020, it renders yields from money market instruments almost insignificant.

This also applies to Government-issued Treasury Bills (TBs), whose average interest rate has been below 20 percent.

In a note on the December 2020 performance of its money market unit trust Old Mutual cautioned that money growth could push interest rates lower in the new year.

“Monetary policy was relatively accommodative during the month ended 31 December 2020.

In context, reserve money balances grew by a noteworthy 24,3 percent during the week ended December 18, 2020.

“This notwithstanding, key monetary variables such as inflation and exchange rate closed the month under review steady, though fragile.

“We anticipate the expansionary monetary policy to yield more tangible downward pressures on interest rates into the New Year.

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‘‘For the month under review; the average money market yield closed the month at 29,41 percent, compared to 24,92 percent in the prior month.”

Latest reserve money figures from the central bank indicate an expansionary monetary policy.

But it is not uncommon in Zimbabwe to see money supply growth during the last quarter of the year due to Government’s need to fund the new agriculture season as well as civil servants bonuses.

“Reserve money for the week ending December 18, 2020 increased by $3,88 billion to $19,87 billion, largely reflecting an increase in banks’ liquidity (RTGS balances) at the Reserve Bank of $3,70 billion. Currency issued and required reserves also rose by $97, 64 million and $82,85 million, respectively,” noted the central bank in its latest reserve money update.

“The rise in reserve money was largely due to liquid injections associated with payment of salaries and bonuses for civil servants.

“Consistent with this development, Government deposits at the RBZ also declined by $1,83 billion during the week under review,” the RBZ note reads.

HERALD