Zimbabwe Keeps World’s Highest Interest Rate; Raises It to 80%

(Bloomberg) -- Zimbabwe's central bank lifted its key interest rate to a record high, to halt a decline in its currency and rein in surging inflation amid food and fuel price pressures that have been exacerbated by the war in Ukraine.

The monetary policy committee hiked the rate to 80% from 60%, Governor John Mangudya said in a statement. That's the highest level since the southern Africa nation's MPC set the rate at 70% in September 2019 and adds to a 2,000 basis point increase in October. 

Since the previous hike, the Zimbabwean dollar has lost nearly two-thirds of its value against the greenback and annual inflation quickened to 72.7%, compared with 54% in October. The local unit officially trades at Z$142.42 per dollar, and changes hands on the parallel market at Z$260 per dollar, according to Zimpricecheck.com, a website that monitors both exchange rates.

The depreciation is in part due to monetary tightening in developed markets such as the U.S. and the growing use of the greenback to pay for most transactions amid a lack of confidence in the local currency.

The cost of goods from bread, cornmeal, fertilizer and fuel have increased in recent weeks, with importers citing the impact of global price spikes due to the war. President Emmerson Mnangagwa last month ordered a review of fuel levies to stave-off the hikes on inflationary pressures.

Read: Zimbabwe to Maintain Fuel Subsidy to Ease Price Spikes (1)

Mangudya cited the negative impact of the price spikes on domestic costs and the currency as reasons for raising the rate. 

“The committee reiterated the need for the bank to remain focused on inflation reduction and putting in place additional policy measures in response to the resurging inflationary pressures and foreign exchange parallel market activities,” he said

While the Reserve Bank of Zimbabwe's latest move may help to anchor inflation expectations and stem the decline of the local currency, it's likely to draw criticism from some politicians and labor unions as the cost of living is already high. 

Inflation averaged 143% in 2021, prompting state and bank workers this year to ask to be paid in U.S. dollars as they attempt to curb the erosion of their earnings.

Other Highlights

• Medium-term bank accommodation facility interest rate raised to 50% from 40%
• Quarterly reserve money growth target reduced to 5% from 7.5%
• Banks allowed to conduct foreign exchange transactions of up to $1,000

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