RBZ dreads further US dollar rate hike

THE Reserve Bank of Zimbabwe (RBZ) is hopeful against a further rate hike by the United States Federal Reserve on the back of the United States dollar depreciating against major currencies.

BY TATIRA ZWINOIRA

A rise in United States interest rates involves American depository institutions lending reserve balances to other depository institutions overnight, on an uncollateralised basis, thus, strengthening the dollar.

In the week ending February 3, the dollar depreciated against the euro and the British pound showing signs of the United States Federal Reserve refraining from raising its interest rates, RBZ said in a report.

“The greenback, however, appreciated against the rand. Its depreciation against the euro and the pound followed the release of US data, which showed a less than expected wage rise in January 2017,” RBZ said in a weekly report for February 3.

“This reinforced the expectations that the Federal Reserve would refrain from raising interest rates in the short term.”

The most noticeable improvement in the foreign currency exchange was the South African rand, which firmed to R12,99 to $1. A stronger rand would mean Zimbabwean exports being more competitive to South Africa as well as to other regional countries.

Zimbabwe’s economy being tied to the United States interest rates will be the most affected by a rise in these rates.

As a result, commodity prices are affected particularly in commodity-dependent countries like Zimbabwe and other regional countries.

According to a research paper by an investment advisory firm, The Balance, the reason that interest rates and raw material prices are so closely correlated is the cost of holding inventory.

“When interest rates move higher, the prices of commodities tend to move lower. When interest rates move lower, commodities tend to rise in price. In a low interest rate environment, the cost of financing stockpiles is lower than when interest rates are high,” the paper said.

“Think about a business that manufactures a product that requires metals, minerals or energy. It is a lot cheaper to store long-term requirements of the goods needed in manufacturing when the cost of money is low. The cost of carry is a term that commodity consumers (and producers) use to describe the costs associated with holding inventories for a period.”

If the United States economy is growing faster, the monetary authority becomes more likely to raise rates or tighten credit to slow down growth before it accelerates too fast. Hawkish or higher interest rate policy occurs when a central bank is in a tightening phase. When the economy slows, the central bank will often loosen credit to provide stimulus to the economy.

In the RBZ weekly economic report, the country’s main commodities all grew as a result of the United States dollar depreciating.

Gold prices rose by 0,1% to close the week under review at $1,211.01/oz while platinum prices increased by 0,5% to close the week at $988,60/oz from the previous week. Both copper and nickel prices rose by 1,4% and 0,8%, respectively.

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