Published by the government of Zimbabwe
Brian Benza
7 June 2006
Harare — Interest rates are expected to soften significantly from current levels for the greater part of this month starting from this week and peaking to match the new inflation levels, economists reckon.
The situation will be worsened by the expected $36 trillion in Treasury bill maturities anticipated this month alone. Since the announcement of the 2005 Fourth Quarter Monetary Policy Statement in January, the Reserve Bank's interest rate policy has been guided by the need to stabilise the high inflationary pressures. And the central bank has been doing that through a tight monetary policy stance based on maintaining short money market positions.
However, in the last few days interest rates that had softened significantly during the past fortnight on the back of heavy Treasury bill maturities and flattening of equities following the brief stoppage over tax issues, firmed marginally. Despite the marginal rise in interest rates this week, in real terms the returns are still very much in the negative given the high inflation figure of over 1 000 percent. The May inflation figures are due this week and money market investors should brace themselves for more disappointment if ther e is no policy-induced rate hike. The 90-day NCDs that had dipped to levels below 250 percent due to easier market conditions had by the end of the week firmed to between 350 percent and 480 percent.
Reflecting the higher inflation environment, the central bank continues to allow the 91-day Treasury bill to move upwards from 350 percent on May 23 to 462 percent at the end of the week. Government expenditure has been largely responsible for the injections into the market and, from last month, the situation is being aggravated by the hefty salary increments awarded to civil servants. The question now is what is going to happen to all these funds which are going to flood the market and what are the implications?
The central bank is most certainly going to adopt an even tighter policy on the market to mop up the excess funds although the inflation pressures imbedded in the injections, particularly the civil servants salary adjustments, cannot be overemphasised. On another note, the reverse can also be expected as more Treasury bill maturities should see an increase in liabilities to the banking sector through deposits, a situation that should trigger a major outflow of funds to the central bank through statutory reserve payments. From this angle the market might therefore be expected to tighten again. Banks hold the largest chunk of the Treasury bill instruments while most salaries are paid out through the banking system.
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