Business, Regulations

How Interest Rates Are Determined in Zimbabwe.

Published: 27 April 2026

Have you ever wondered how interest rates are determined. We have decided to have an article explaining how interest rates are determined from the Reserve Bank of Zimbabwe (RBZ) perspective, drawing heavily from RBZ thinking.

How Interest Rates Are Determined in Zimbabwe

A Simple Explanation from the RBZ Perspective

1. Why Interest Rates Matter

Interest rates affect almost everyone in Zimbabwe, even if they do not realise it. When you take a loan to buy a house, start a business, or pay school fees, the interest rate determines how much extra money you must repay. When you save money at the bank, interest rates decide how much reward you receive for keeping your money there.

From the Reserve Bank of Zimbabwe (RBZ) perspective, interest rates are not just bank charges; they are a key tool for guiding economic activity, encouraging savings, controlling inflation, and supporting economic growth. If interest rates are too high, borrowing becomes expensive and businesses slow down. If they are too low, savings may dry up, inflation can rise, and the financial system may become unstable.

Zimbabwe’s situation is unique and complex, especially because of its history of dollarisation, liquidity shortages, high country risk, and limited access to external funding. This means interest rates in Zimbabwe are determined very differently from those in countries with strong local currencies and deep financial markets.

This article explains, in very simple terms, how the RBZ looks at interest rate determination, the factors involved, and why borrowing often feels expensive in Zimbabwe.

2. What Is an Interest Rate in Simple Terms?

An interest rate is simply the price of money.

If you borrow money, interest is the price you pay for using someone else’s funds.
If you save money, interest is the reward paid to you for postponing spending.

From the RBZ’s point of view, interest rates must strike a balance between:

Protecting savers
Supporting borrowers
Keeping banks stable
Ensuring economic growth

Just like the price of maize is affected by supply and demand, interest rates are affected by how much money is available, who needs it, and how risky the environment is.

3. The RBZ’s Traditional Role in Setting Interest Rates

In most countries, the central bank:

Controls short-term interest rates
Acts as lender of last resort
Provides a clear policy rate (such as a bank rate)

Normally, the central bank sets a benchmark rate, and all other interest rates in the economy are built around it.

However, Zimbabwe’s case has often been different.

4. Zimbabwe’s Special Context: A Multi‑Currency and Liquidity‑Constrained Economy

4.1 Dollarisation and Limited Monetary Control

After 2009, Zimbabwe adopted a multi‑currency system, mainly using the US dollar.
This meant:

RBZ lost the power to print money
RBZ could not fully control money supply
Traditional tools for setting interest rates became weak

Unlike the US Federal Reserve, the RBZ could not simply adjust money supply to influence rates. Therefore, interest rates became largely market‑driven, influenced by risk and liquidity rather than policy signals.

4.2 Liquidity Shortages

One of the biggest influences on interest rates in Zimbabwe is liquidity shortages.

In simple terms:

Banks do not have enough deposits
Cash is scarce
Short-term money is expensive

When money is scarce, lenders charge higher interest to protect themselves. From the RBZ perspective, this scarcity explains why interest rates remained high even when inflation was low.

5. Interest Rates and Inflation: The Expected Relationship

Under normal conditions:

High inflation → high interest rates
Low inflation → low interest rates

Zimbabwe, however, experienced:

Very low or even negative inflation
Persistently high interest rates

From the RBZ’s view, this “abnormal” situation is explained by non‑inflation factors, especially:

Risk
Liquidity shortages
Weak financial confidence
High operating costs in banking

So RBZ does not only look at inflation when assessing interest rates.

6. The Yield Curve: A Key RBZ Concept

6.1 What Is a Yield Curve (Simply Explained)?

A yield curve shows:

Short‑term interest rates
Medium‑term interest rates
Long‑term interest rates

Think of it as a ladder:

Short loans (3 months) at the bottom
Long loans (5–10 years) at the top

Normally:

Short‑term rates are lower
Long‑term rates are higher (because of risk and uncertainty)

6.2 Zimbabwe’s Yield Curve Problem

The RBZ observed that Zimbabwe often had an inverted yield curve, meaning:

Short‑term interest rates were higher
Long‑term rates were lower

This sends bad signals:

It suggests economic uncertainty
It discourages long‑term investment
It raises cost of working capital for businesses

From the RBZ perspective, a distorted yield curve reflects structural weaknesses, not healthy market behaviour.

7. Treasury Bills as an Anchor for Interest Rates

7.1 The Role of Treasury Bills (TBs)

Treasury Bills are government borrowing instruments.
They are considered risk‑free, because the government is expected to repay them.

RBZ sees TBs as:

A reference point for interest rates
A guide for banks when pricing loans and deposits

If TB yields are high:

Banks demand higher lending rates
Accommodation (overnight borrowing) rates also rise

7.2 Problems with TB Pricing

RBZ identified issues such as:

Same‑maturity TBs issued at different rates
Short‑term TBs yielding more than long‑term TBs
TB yields exceeding economic fundamentals

These issues contributed to confusion and instability in the interest rate structure.

8. Country Risk: A Major Driver of High Interest Rates

8.1 What Is Country Risk?

Country risk refers to the chance that:

A country may fail to repay debt
Policies may change unexpectedly
Investors may lose money

Zimbabwe’s high country risk is influenced by:

External debt arrears
Limited access to international markets
Policy uncertainty

8.2 How Country Risk Affects Interest Rates

When a bank borrows offshore at:

10% interest It cannot lend locally at:
5% interest

So domestic lending rates rise to cover:

Offshore borrowing costs
Risk premiums
Operating expenses

From the RBZ’s viewpoint, risk premiums explains much of Zimbabwe’s high interest rates, not greed alone.

9. Deposit Rates, Lending Rates, and the Interest Rate Spread

9.1 The Interest Rate Spread Explained

Interest rate spread =
Lending rate − Deposit rate

In healthy systems:

The spread is narrow
Banks earn modest margins

In Zimbabwe:

Lending rates are high
Deposit rates are low
The spread is wide

RBZ acknowledges that wide spreads discourage:

Saving
Borrowing
Financial inclusion

9.2 Why Deposit Rates Remain Low

Banks keep deposit rates low because:

Deposits are short‑term and unstable
Liquidity risk is high
Operating costs are high
Non‑performing loans increase risk

From RBZ’s perspective, improving deposit rates requires system‑wide confidence, not just directives.

10. Moral Suasion and Interest Rate Guidelines

Because RBZ could not fully enforce interest rates under dollarisation, it relied on:

Moral suasion (persuasion)
Negotiated guidelines with banks

These included:

Rate caps for productive sectors
Lower rates for low‑risk borrowers
Penalties for defaults

RBZ views these measures as temporary stabilisers, not long‑term solutions.

11. RBZ’s Recommended Interest Rate Structure

Based on economic modelling, RBZ estimated that:

Short‑term risk‑free rates should be around 5–6%
Long‑term rates should gradually rise to 7–8%

This structure is seen as:

Affordable for government
Supportive of lending
Encouraging savings
Consistent with fundamentals

12. Why Interest Rates Stay High Despite RBZ Efforts

Even with guidance, rates remain high due to:

Weak liquidity
High cost of offshore funding
Structural banking risks
Economic uncertainty
Shallow financial markets

RBZ recognises that policy alone cannot fix interest rates without broader economic reforms.

13. The Link Between Interest Rates and Economic Growth

From the RBZ’s perspective:

High interest rates suppress investment
Low investment slows growth
Slow growth reduces deposits
Reduced deposits push rates higher

This creates a vicious cycle.

Breaking it requires:

Improved exports
Better debt management
Increased foreign investment
Stronger confidence

14. RBZ’s Long‑Term Vision for Interest Rates

The RBZ believes sustainable interest rate stability depends on:

A normal yield curve
Improved liquidity
Lower country risk
Clear policy consistency
Stronger financial institutions

Interest rates should:

Reflect economic fundamentals
Guide capital to productive sectors
Promote long‑term development

15. Conclusion: Understanding Interest Rates the RBZ Way

In simple terms, the RBZ sees interest rates in Zimbabwe as shaped by risk, liquidity, and confidence, more than by inflation alone.

High interest rates are not purely a policy choice; they are a symptom of deeper economic challenges. The RBZ’s role is to:

Guide the market
Reduce distortions
Encourage fairness
Support growth within existing constraints

Until liquidity improves and country risk declines, interest rates will remain under pressure. However, with structural reforms and confidence rebuilding, Zimbabwe can move toward a more affordable and stable interest rate environment.