The Reserve Bank of Zimbabwe (RBZ) expects the annual inflation rate to continue falling through the end of the year, but has raised its December 2021 target to between 36% and 53 %, from 25% to 35%.
But the central bank estimates that this will not slow the expected economic growth of 7.8% after a bumper agricultural season.
In an economic update released Thursday, RBZ Governor Dr John Mangudya said inflation would maintain its downward trajectory, albeit at a slower pace.
“Overall, the bank is confident that the current downward inflation path and exchange rate stability will be maintained over the forecast period, supported by a sustained performance of the external sector, driven by a strong recovery of the global economy. “
He said inflationary pressures were due to steadily rising global prices, increased liquidity resulting from the economic recovery induced by Covid-19, the planned adjustment of electricity tariffs and weakening of the free market exchange rate.
Inflation has gradually declined, from a peak of 837.5% in July 2020 to 51.55% in September 2021.
Based on the observed average monthly inflation of 2.5%, annual inflation is now expected to end the year below 50% in the baseline scenario (assuming there are no forces d ‘intervention).
Dr Mangudya said possible adjustments to some administered prices, especially electricity, which was due to be priced in the third quarter of the year, presented downside risks.
International food prices are also expected to increase by around 25% in 2021 before stabilizing in 2022.
The continued depreciation of the local currency against the US dollar is expected to exert inflationary pressures on the economy.
While the exchange rate in the foreign currency auction market stabilized at US $ 1: $ 86.7, the free market exchange rate had recently increased from around US $ 1: $ 130 to around 1 US $: $ 160, which implies a parallel market premium of over 70%. , the transmission effects of which could exert pressure on prices.
“Based on recent developments, annual inflation is expected to end the year between 35% and 53%, up from revised targets of 25% to 35%. In addition, rising international food and oil prices as well as global inflation continue to exert additional inflationary pressures on the national economy, ”said Dr Mangudya.
In line with the cautious stance of RBZ monetary targeting, the growth of reserve currency, which is an important determinant of inflation levels in any economy, has slowed.
As of the week ending September 17, 2021, the reserve money supply stood at $ 28.9 billion, well below the quarterly target of $ 29 billion for the end of September.
After reducing the quarterly reserve currency target to 20%, the reserve currency would be contained within the target of $ 35 billion by December 2021.
The economy is expected to rebound from a decline of minus 5.3% in 2020 to 7.8% in 2021.
However, an average growth rate of over 5% per year is expected over the medium term, particularly the period covering the National Development Strategy (NDS1), as Zimbabwe plans to transition to an upper middle income economy. by 2030.
The strong growth envisioned for this year will be anchored on a good agricultural season, higher international prices of mineral raw materials, a stable macroeconomic environment and a moderate Covid-19 pandemic.
The higher economic growth expected this year, Dr Mangudya added, was due to higher growth in agriculture, power generation, accommodation and food services, as well as financial services.
The RBZ continues to ensure that productive sectors of the economy have access to capital and foreign exchange to meet their import needs.
The auction system ensured uninterrupted financing of key imports such as raw materials and capital and equipment for productive sectors.