By the end of the first quarter of this year, the Reserve Bank of Zimbabwe (RBZ) will once again give interest rates direction in the market after the adoption of multi currencies five years ago made the central bank a mere spectator in the country's financial arena, the bank said this week.
In a monetary policy statement presentation this week, acting central bank chief Charity Dhliwayo said the restoration of the bank's lender of last resort status would see the bank coming up with an overnight accommodation rate.
An overnight rate is a rate that large banks use to borrow and lend from one another in the overnight market.
"The restoration of the lender of last resort (LOLR) facility implies that an overnight accommodation rate will be announced by 31 March, 2014 and becomes applicable for the facility. The overnight accommodation rate will be the anchor interest rate that will act as a benchmark for market rates," said Dhliwayo.
"As market conditions improve, the bank intends to introduce repos and reverse repos to improve interbank trading and help ease attendant liquidity challenges."
A repo rate is the rate which a central bank repurchases government securities from commercial banks, depending on the level of money supply it decides to maintain in the country's monetary system.
The overnight rate will be used as a benchmark rate, she said. After the adoption of multiple currencies in early 2009, RBZ virtually lost control of interest rates.
"This notwithstanding, as published by the Monetary Policy Committee of the Reserve Bank, the country's interest rate policy will be influenced through the proposed indicative yield curve. Though not prescriptive in nature, the proposed yield curve plays a signaling role to the direction of interest rates in the economy.
Issuance of Treasury Bills (TBs)," she said.
"The successful resuscitation of the lender of last resort functionrequires that deficit institutions intending to resort to the Central Bank for overnight accommodation have acceptable collateral. In this regard, the Reserve Bank will issue TBs with rates aligned to theproposed indicative yield curve alluded to in the foregoing."
She added the issuance of TBs would achieve the twin objectives of providing acceptable collateral for banks, while simultaneously raising funds for government to bridge short term financing gaps.
"The Reserve Bank expects to issue TBs as soon as other related modalities have been finalised," said Dhliwayo.
Under normal circumstances, monetary authorities are able to mandate specific interest rates on loans, savings accounts or other financial assets. By raising the interest rates under its control, a central bank can "contract" the money supply, because higher interest rates encourage savings and discourage borrowing.
On the other hand, a central bank can use an expansionary policy, which entails lowering interest rates to stimulate economic growth in recession period.
But the adoption of multi-currencies in 2009 saw the central bank's role as the lender of last resort quickly disappearing along with its key monetary policy role.
The RBZ in February last year signed a memorandum of understanding (MoU) with banks providing a framework for determining bank charges and interest rates margins following complaints by the transacting public, but banks quickly warned this would deprive them of income amounting to US$73 million to December.
Under the MoU, the central bank and the financial institutions agreed to develop a standardised format of disclosure requirements to ensure that participating financial institutions clearly disclose all their fees and charges in a uniform manner.