Zimbabwe gave up its unenviable position of having the world’s highest interest rate to Argentina, after slashing borrowing costs to help boost economic growth.
The monetary policy committee cut the benchmark interest rate to 130% from 150%, which lags Argentina’s 133%.
The MPC acted because of “emerging global risks and the need to keep exchange rate and inflation expectations anchored to support economic growth,” Governor John Mangudya said in an emailed statement on Tuesday.
“Subdued global growth emanating from geo-economic fragmentation and the effects of tight monetary policy, high interest rates, credit squeeze and low international commodity prices could pose significant risks to the current stability in the domestic economy,” he said.
Unlike Argentina, which raised borrowing costs by 15 percentage points to 133% on Oct. 12 to curb price growth that’s running at 138%, government interventions in Zimbabwe have enabled it to cut rates.
The southern African nation’s local unit plunged about 85% against the greenback between May and June, causing inflation to surge to 176%. The authorities then liberalized the exchange rate and introduced measures to promote use of the Zimbabwe dollar, such as requiring corporate taxes to be paid in the currency, which helped stabilize it and restore some price stability.
Annual inflation in Zimbabwe slowed to 18.4% in September from 77% a month earlier after the statistics office revised its methodology to take into account the dominant role the US dollar plays in the economy.
On Tuesday, the central bank announced a further easing of exchange-rate curbs, scrapping a 10% markup that businesses are allowed to add onto the official rate. The move is expected to help narrow the 30% gap between the official and parallel market exchange rates.
The inflow of US dollars into Zimbabwe has, meanwhile, slowed alongside a fall in global commodity prices. Export revenues fell more than 9% to $3.6 billion in the year through September, the central bank said. To mitigate against the decline in foreign-currency earnings, it will now only allow exporters to retain 75% of their earnings in hard currency, while the rest will have to be surrendered to the bank.
“The net effect of this measure is to increase foreign-exchange resources available to the bank and government to meet foreign-exchange requirements for the settlement of national and international obligations,” Mangudya said.
(Updates with currency liberalization, foreign exchange flows in last three paragraphs.)