Zimbabwe holds key interest rate at 20% with eye on inflation

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Zimbabwe left its benchmark interest rate unchanged even as it sees inflationary pressures easing for the rest of the year under its bullion-backed currency.

The central bank’s monetary policy committee kept the rate at 20%, Governor John Mushayavanhu, said Thursday in an emailed statement. “The MPC has resolved to maintain the current tight monetary policy stance to ensure the sustenance of the current stability,” said Mushayavanhu.

Zimbabwe’s monthly consumer prices fell 2.4% in May after it switched to computing inflation in its new currency, the ZiG, that started trading on April 8. The rate is expected to be around 0% this month due to declines in both food and non-food inflation, according to Mushayavanhu. “Inflation pressures will remain subdued in the outlook period with projected inflation to end the year below 5% as the exchange rate remains stable,” he said.

The ZiG, short for Zimbabwe Gold, is the southern African nation’s sixth attempt at having a functioning local currency in 15 years. It replaced the battered Zimbabwean dollar and is backed by 2.5 tons of gold and $100 million in foreign currency held by the Reserve Bank of Zimbabwe. The currency weakened to a record low against the dollar to 13.68 per greenback, according to data posted Thursday on the central bank’s website.

Authorities have introduced measures to increase its use and prevent speculation including cracking down on street currency traders helping to drive some business into the banks and overhaul the tax system.

The latest rate decision coincided with a visit by a team from the International Monetary Fund which was in the country to assess the impact of the ZiG on the economy. The Washington-based lender has called the switch to the currency an “important” step. The southern African nation hopes to secure a deal for an IMF staff-monitored program by October.

The program is crucial to Zimbabwe’s efforts to re-negotiate its $19.2 billion arrears with creditors including the World Bank, African Development Bank, Paris Club and European Investment Bank.