Exorcise “2007/8 hyperinflation ghost” haunting stability – respected banker Mverecha

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By Alois Vinga

RESPECTED banker and Agribank Chief Economist, Joseph Mverecha, has urged policy makers to enact policies which arrest inflation surging expectations and collapse the parallel market if the country is to enjoy long term exchange rate stability.

The remarks come at a time when the public has tabled complaints to authorities against forward pricing by businesses, often way ahead of the obtaining official and parallel market rates in a move aimed at hedging against imminent expected exchange rates.

While the parallel market rate is currently averaging between ZW$700 and ZW$800 for every US$1, most retailers are already using a peg which is much higher than the obtaining rates, triggering an unending source to spiralling inflation and erosion of disposable incomes.

Presenting an academic paper titled “Monetary Policy shocks, Exchange rate volatility and Inflation Persistence: Implications for Currency Stability and Inflation” at the ongoing Zimbabwe Economic Development Conference currently underway in the resort town of Victoria Falls, Mverecha emphasised the need to arrest such perceptions.

“Decisions on inflation and expectations have their foundation from a myriad of microeconomic decisions at the household, individual and firm level, taking into account a myriad of factors – past history of inflation 2007/08 era; recent money growth trends, recent exchange rate depreciation, among many other factors,” he said.

The acclaimed banker stresses that the interplay of these decisions occurs in different markets – money markets, foreign exchange markets and capital markets underscoring that “the confluence of all these forces”, is their impact on price formation in the goods markets.

In addition, the paper said, economic agents tend to follow a “herd instinct” with respect to inflation expectations formation – psychology of adverse expectations, uncertainty, fear and information asymmetry.

He observed that inflation expectations can be generated through several channels, reflecting the multiple interactions of economic agents, in aggregate translating into demand and supply and highlighting that for the most part, they are generated through a combination of adaptive expectations, and forward looking repricing/replacement pricing.

The paper establishes that Inflation expectations can also be generated as a mark- up over cost, particularly in an environment where costs are changing more frequently across supply chains.

“The inflationary spiral is largely explained by exchange rate depreciation and inflation expectations. In the presence of inflation expectations, the short run dynamics amplify the exchange rate movements in response to monetary shocks.

“Stabilising inflation therefore requires first, policies to collapse the parallel market and inflation expectations,” the monograph added.