RBZ chief’s hawkish stance calms market

PHILLIMON MHLANGA

 

Government and the Reserve Bank of Zimbabwe (RBZ) governor, John Mangudya, delivered a hawkish and contractionary message that multiple analysts said is crucial in the short term to ensure sustained long term macroeconomic stability.

It comes at a time when fluctuation in exchange rates and inflationary pressures were elevated. The economy, in Mangudya’s opinion, was seriously threatened by exchange rate volatility and high inflation.

Sentiment is starting to change as a result of the impact of significantly tighter conditions.  Additionally, it’s happening just six days before the  southern African country goes to polls set for August 23, 2023.

Mangudya noted that the calmness in the domestic markets ably attested to the fact that the economy was on the right track to price and exchange rate stability, and that maintaining the right policy mix was still essential.

In order to sustainably anchor inflation and exchange rate expectations, Mangudya stated that the RBZ will continue to pursue a tight monetary policy stance for the ensuing six months.

“There exists a strong correlation between money supply, exchange rate and inflation as evidenced by spikes in both exchange rate and inflation that have coincided with increased liquidity locally. We believe maintaining a suitably tight monetary policy in the short to medium term will be key to ensuring sustained, long term macroeconomic stability,” securities firm, FBC Securities said this week.

FBC Securities, however, claimed that the local stock market is negatively impacted by the tight monetary policy.

“While liquidity management efforts have been key to restoring relative stability to the local economy, money supply constraints have restricted the local stock market’s performance. Year to date market performance has been largely subdued, generally being outpaced by inflation and exchange rate movements. We anticipate market performance to remain under pressure in the short to medium term as a result of the tight liquidity environment,” FBC Securities said.

However, FBC Securities said the local economic stability remained fragile. It said without careful liquidity management, increased money supply may have a destabilizing effect on the economy in the second half of the year.

According to other analysts, the government and RBZ’s bold policy intervention measures for dealing with the price and exchange rate volatility have been very successful in putting a stop to the instabilities and bringing about the much-needed normalcy in the price and exchange rate dynamics and calmness in domestic markets.

They claimed that this sense of normalcy was essential in securing the strong economic growth anticipated to reach 5.3%  this year.

“Restoring price stability will require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy,” an independent economist, Mirirai Mashoko told Business Times yesterday.

 

Related