RBZ hopes to arrest deflation

HARARE - The Reserve Bank of Zimbabwe (RBZ) says the country will soon emerge out of deflation due to an increase in broad money supply into the economy.

Statistics from the apex bank show that annual growth in broad money increased by 12,65 percent in June 2014 to $4 323,6 million from $3 838,2 million in June last year.

In its monthly economic review for June, the central bank noted deflationary pressures in the economy continue to slowly dissipate, with annual headline inflation increasing for the third consecutive month in June 2014.

“Annual inflation stood at — 0,08 percent in June 2014, gaining 0,11 percent on the May 2014 rate of — 0,19 percent, mainly driven by both food and non-food inflation.

“Year-on-year food inflation increased from — 3,75 percent in May 2014, to — 3,54 percent in June 2014. Food inflation is, however, expected to remain depressed in the outlook period owing to good agriculture harvest,” said RBZ.

In the medium to long term, the central bank said developments in the South African rand/$ exchange rate, international oil prices, the pricing of utilities and the level of aggregate demand in the domestic economy will continue to influence inflation developments.

This comes as the International Monetary Fund (IMF) recently said the southern African country was likely to come out of deflation by year end, with inflation seen at 0,2 percent and rising to 1,2 percent in 2015.

In a comprehensive report released after the latest Article IV consultations, IMF said the country however needs in the medium-term, to come up with structural reforms that improve the business environment and stimulate domestic and foreign investment that could offset the deflationary impulse.

Zimbabwe slipped into deflation in February recording an annualised inflation figure of — 0,49 percent.

In March it shed 0,42 percentage points to end at — 0,91 percent. It rose slightly in April and May but remained in the negative territory at — 0,26 percent and — 0,19 percent.

The Bretton Woods institution noted that deflation was triggered by weak aggregate demand.

“On the upside, temporarily falling prices benefit consumers with job security. By delivering a boost to aggregate demand, falling prices may contribute to eroding the country’s negative output gap,” said the IMF.

“Deflation could also correct the existing overvaluation in the real exchange rate, although that would require prices of non-traded inputs (notably labour) and final goods to fall faster than the prices of traded goods, which has not been the case so far. (Also), falling prices boost real money supply and could alleviate somewhat the persistent liquidity shortages.”

On the downside, persistent deflation may increase the real burden of existing debt in a country that is already under financial stress.

“Deflation hurts producers and might reduce Zimbabwe’s productive capacity, if it leads to widespread company downsizing and closures, given downward wage rigidity,” the IMF said.