The month of September marked a defined shift of monetary policy by key central banks into a rate cutting cycle. According to Reuters, five of the nine central banks overseeing the most heavily traded currencies that held meetings in September lowered benchmarks. Of note, the US Federal reserve shaved 50 basis points off its key lending rate to a range of 4.75% to 5%, marking its first easing in four years. Sweden, Switzerland, Canada and the euro area announced rate cuts of 25 basis points each, whilst in emerging markets, South Africa also reduced its benchmark rate by the same amount signaling a more optimistic outlook for inflation.
Locally, inflation was heightened in the month of September. US$ inflation gained 0.5 percentage points on the August rate of 0.2% to tally at 0.7%. Annual USD inflation crept up from 3.7% to 4.2% for the month, spurred mainly by change in costs of Food and Non-Alcoholic beverages. ZiG inflation went up 4.4 percentage points to close at 5.8% in September with Matebeleland North posting the steepest increase in ZiG m-o-m inflation at 8.5%. As a result, the blended inflation rate for the month of September increased from 0.4% to 1.5%.
In the last sitting of the Monetary Policy Committee (MPC), at the forefront was the resurgence in exchange rate pressures since the second half of August 2024, as reflected by the widening parallel market exchange rate premium and the increase in inflationary pressures. As per the statement, this was despite the 13.4% increase in foreign currency inflows in the first 8 months of the year to US$8.47bn as well as US$190mn that was traded through the interbank foreign exchange market. The MPC introduced a raft of measures to ensure that inflation expectations remain well anchored as well as to dissipate current inflationary pressures. The Bank Policy rate was increased from 20% to 35% whilst statutory and reserve requirements for demand and call deposits were increased and standardized from 15% to 20%, regardless of currency denomination. Notably, the MPC indicated that it will be pivoting towards greater exchange rate stability, in line with the increased demand for foreign currency. The official rate was then devalued from US$1: 13.9987 to US$1: 24.8831 on the 27th of September. Post these changes, the parallel market premium went from a peak of 137.84% to close the month off at 34.63%.
Overall, monetary authorities are convinced that the aforementioned measures will go a long way in addressing the emerging exchange rate risks, anchor inflation expectations and stabilise prices in the near to short term. In our view, monetary stability will hinge on maintained fiscal discipline by authorities. Expenditure pressures will likely emanate from infrastructure spend as well as ongoing negotiations for conditions of service for civil servants.
