The bank rate, base rate, or discount rate is the interest rate that the central bank (Reserve Bank of Zimbabwe in case of Zimbabwe) charges on loans and advances to domestic banks. When the central bank lends money to commercial banks, it charges an interest rate. We call this interest rate the ‘bank rate’. Every bank bases its interest rates on the bank rate.
How a Bank rate regulates the economy
Central banks can regulate the level of economic activity in a country. They do this by managing the bank rate. For example, when the bank wants to boost the economy, it lowers the rate. Similarly, when unemployment is high, the central bank wants interest rates to go down. Central banks will also reduce bank rates when company closures are increasing, and investment and borrowing levels are low.
On the other hand, when there are signs that the economy is overheating, it will try to cool things down. The central bank raises the bank rate when it wants to slow down the economy. When inflation is too high, for example, it means that the economy is overheating. Banks don’t like to borrow to meet Reserve Requirement when the bank rate is high. This causes them to build up reserves, and thus make fewer loans.
Conversely, when the rate falls the effect is the opposite; banks make more money available for lending. The term ‘bank rate’ might also refer to the rates commercial banks charge their customers on loans.
Bank rate in Zimbabwe
The Reserve Bank of Zimbabwe raised interest rates to 35% at its June 2020 Monetary Policy meeting with the stated intention to “curb speculative borrowing”, though inflation was also surging. “The rate will be reviewed from time to time as dictated by prevailing market fundamentals,” governor John Mangudya said. Zimbabwe is currently battling a major economic crisis. According to the central bank, year-on-year CPI inflation soared to 785% in May 2020.
February 2021 Monetary Policy
The RBZ increased its Bank policy rate for overnight accommodation from the 35% to 40% per annum and the medium-term lending rate for the productive sector lending from 25% to 30% per annum. The decision on interest rates took into account the prevailing liquidity conditions in the market at that time and the need to continue controlling speculative borrowing.