Harare - The Reserve Bank of Zimbabwe has raised the bank policy rate from 20% in April this year to 35%, according to the latest Monetary Policy Statement released last Friday. 

Standard and statutory reserve requirements for demand and call deposits, both local and foreign currency, have been increased from 15% and 20% respectively to 30%.

Additionally, the statutory reserve requirements for savings and time deposits for both local and foreign currency have been raised from 5% to 15%.

The bank has also allowed for greater exchange rate flexibility in line with the increased demand for foreign currency in the economy.

Furthermore, the amount of foreign exchange individuals can take out of the country has been significantly reduced from US$10,000 to just US$2,000.

Analysis

Interest Rate Increase

This increase means that borrowing costs for commercial banks and financial institutions will rise, making loans more expensive for both businesses and consumers. Higher borrowing costs will lead to increased financing costs for businesses relying on loans and credit lines, potentially deterring investment and expansion as accessing capital becomes more costly.

Companies, especially SMEs that depend on loans to manage cash flow, will struggle to maintain operations due to high borrowing costs. With these increased costs, profit margins will shrink unless businesses pass these expenses onto consumers through elevated prices, which could also reduce demand.

This situation may hinder economic growth, as businesses face higher financing costs and consumers cut back on spending due to the increased costs of credit. As borrowing becomes more expensive, individuals may reduce their spending, which could slow down economic activity, particularly in retail and service sectors.

Individuals with loans, mortgages, or other credit arrangements will experience higher interest payments, reducing their disposable income. Consequently, businesses may pass on their increased costs to consumers, leading to price hikes in goods and services, thereby raising the cost of living in an already inflationary environment.

On the positive side, these actions are intended to control inflation, manage liquidity, and stabilize the local currency by discouraging excessive borrowing and spending. By raising the policy rate, the Bank aims to alleviate demand-side pressures on the economy, helping to curb inflation and stabilize exchange rates.

Statutory Reserve Requirements Increment

The policy now requires banks to hold a greater percentage of their deposits as reserves with the central bank—30% for local currency and 15% for foreign currency. These reserves represent a portion of the bank’s deposits that cannot be lent or invested.

This increase will raise the cost of doing business for banks, as they will need to hold more reserves that typically do not generate interest. This could reduce profitability and lead banks to charge higher fees or raise interest rates on loans to compensate for the shortfall.

With fewer funds available for lending, banks may increase interest rates on loans to manage demand, further deterring borrowing. The implication is that banks will have less money to lend, as a larger portion of their deposits will be kept as reserves, limiting their ability to extend credit.

Consequently, businesses and individuals may find it more challenging to access loans, and interest rates on loans will likely rise as banks attempt to offset reduced liquidity. Economic activity in sectors dependent on borrowing may slow down.

However, by increasing reserves, the amount of money circulating in the economy will be reduced, helping to alleviate inflationary pressures by curbing the availability of money for spending and investment.