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Inflation fears deepen after RBZ's gloomy Q1 projections
The Financial Gazette (Zimbabwe)
January 26, 2006

http://www.fingaz.co.zw/story.aspx?stid=591

When central bank governor Gideon Gono said on Tuesday that he saw inflation racing to 800 percent by March, his audience gasped in horror.

But critics say his estimates may in fact be conservative.

Despite Gono’s new estimates being a steep downgrade on his earlier forecasts, the plunge in the value of the Zimbabwe dollar over the past week, expectations of higher wage demands and inflation expectations may in fact take the rate above 1000 percent by the end of this quarter, economists say.

Gono had earlier projected inflation at 60-80 percent by end of 2006, but now sees the figure ending the year at 230 percent.

However, Gono continues to see a dip in the rate after the first quarter that will take inflation towards double digits by mid –2007.

Economists do not share this optimism and instead worry that the rate may now be out of the reach of the central bank, which had pledged a tighter monetary policy to slow inflation.

"At its current levels, inflation becomes self-perpetuating because of expectations of higher inflation," economist James Jowa told The Financial Gazette yesterday.

Economists say because of stronger inflationary pressures, Gono will be trapped between the need to suppress money supply growth on one side, and pressure to print more money to fund government spending, which will only increase with inflation.

The central bank governor conceded that his programme of sinking cheap funding into the ailing agricultural and industrial sectors had broadened money supply (M3) growth, up from 177.6 percent in January 2005 to 411.5 percent by November. But Gono’s justification is that "theory does not apply to survival situations".

While admitting that cheap funding had fuelled inflation, Gono has however planned a new financing programme for farmers, the Mechanisation Support Programme, where the Reserve Bank of Zimbabwe (RBZ) will fund the purchase of farming equipment.

Inflation ended 2005 at 585 percent, much higher than the central bank’s year-end forecasts of 280-300 percent. Gono said this week a tighter holding on monetary policy would form the core of the RBZ’s efforts to fight inflation.

"What he (Gono) has tried to do here is talk down inflation. But I think he will admit that it’s going to take a lot more than that to bring this (inflation) down," one economist said yesterday.

A survey of business and other social groups done by the central bank reveals weak sentiment on inflation.

The survey shows that only 2.2 percent of respondents said efforts to deal with inflation were either "good" or "excellent", while some 45.5 percent anticipate high inflation in 2007.

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