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Inflation (Economics)

Zimbabwe's Central Bank Raises Benchmark Rate to 200%: Will Aggressive Monetary Policy Tackle Inflation?

Strategic Insights

— 2 min read

Inflation in Zimbabwe is on the rise, driven by two fundamental drivers: monetary expansion that is not supported by economic growth and de-anchored inflation expectations. The central bank of Zimbabwe has raised its benchmark rate to a record 200% in an effort to combat inflation, which accelerated to 192% in June. However, this aggressive monetary policy tightening may come at the cost of reduced output and potentially stagflation, a scenario where growth and inflation simultaneously decline. The country's economic woes date back to the 1990s when a poorly implemented land reform program led to a sharp drop in agricultural output, prompting the government to finance higher spending by printing money.

Key Takeaways:

  • The central bank of Zimbabwe has raised its benchmark rate from 80% to a record 200% to combat inflation, which accelerated to 192% in June.
  • The two fundamental drivers of inflation in Zimbabwe are monetary expansion that is not supported by economic growth and de-anchored inflation expectations.
  • Aggressive monetary policy tightening may come at the cost of reduced output and potentially stagflation, a scenario where growth and inflation simultaneously decline.
  • The country's economic woes date back to the 1990s when a poorly implemented land reform program led to a sharp drop in agricultural output.
  • The government's decision to abandon the Zimbabwe dollar in 2009 and reintroduce it in 2018 did not curb inflation, with prices surging to 558% in 2020.
  • The central bank's introduction of gold coins as a store of value and means of exchange is an implicit admission that the printed Zimbabwe dollar has failed to perform its role.
  • The cost of living crisis stoked by high inflation has already fuelled numerous strikes by government employees, with the prospect of growing labour unrest looming large.

Statistics:

  • Inflation in Zimbabwe accelerated to 192% in June, driven by the two fundamental drivers of monetary expansion and de-anchored inflation expectations.
  • The central bank of Zimbabwe has raised its benchmark rate to 200%, a record high.
  • The economy's output and inflation are expected to decline simultaneously, a scenario referred to as stagflation.
  • The Zimbabwe dollar has failed to perform its role as a store of value and means of exchange, prompting the central bank to introduce gold coins as an alternative.
  • 51% of Zimbabweans rely on black markets to access essential goods and services, leading to widespread shortages and a thriving underground economy.
  • The country's economic growth has been hindered by higher global inflation, tighter global financing conditions, debt distress, additional supply disruptions, and increased risk of geoeconomic fragmentation.

Sources:

  • The Conversation -- Africa -- By Jonathan Munemo, Professor of Economics, Salisbury University
  • Photo by Jekesai Njikizana/AFP via Getty Images
  • Inflation is spiking in Zimbabwe (again). Why high interest rates aren't the answer (https://theconversation.com/inflation-is-spiking-in-zimbabwe-again-why-high-interest-rates-arent-the-answer-187362)

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