Chief among the safeguards are control of broad money supply, restraint in Government expenditure, Treasury Bills, Reserve Bank savings bonds, interest rate adjustments and close monitoring of banks.
The RBZ liberalised the US dollar exchange rate against Real Time Gross Settlement (RTGS) balances, bond notes and all currencies in the multi-currency basket to formalise trade in currency.
Amid a pricing chaos, which has seen prices of goods and services tracking parallel market rates, the central bank took the decision to control trade in forex to ensure exchange rates stability and fairness.
Floating the exchange rate entails denominating existing RTGS balances, bond notes and coins in circulation as RTGS dollars to establish an exchange rate between current monetary balances and foreign currency.
This comes after the realisation that it was no longer tenable to maintain the exchange rate at fixed parity of one to one, which came after wild increases in parallel market rates late last year.
Since Zimbabwe dollarised in 2009 and authorities maintained the position of the multi-currency system—anchored by the US dollar–the market took guidance on setting prices in local currencies from premiums of greenback exchange rates on the black market.
There has been palpable fear that excessive printing of electronic dollars, by the previous administration, had released too much liquidity into the market, which could fan upward swings in the floated exchange rate.
Presenting the 2019 Monetary Policy Statement in Harare on Wednesday central bank governor Dr John Mangudya, said while the country apparently had huge bank deposits not all of it were usable.
Dr Mangudya also pointed out that out of about 3,2 million bank accounts, only 10 percent of those accounts held balances in excess of $1 000 of the now RTGS denominated dollars.
He made the remarks following assertions from economists that the huge electronic dollar deposits already in the system could spark runaway exchange rate increases, which would drive inflation.
But Dr Mangudya dismissed the possibility of an exchange rate rampage saying only $1,8 billion out of total market deposits of $10,2 billion was money that was usable for transacting purposes.
"The $10 billion of deposits in Zimbabwe is made up of the following characters: $4 billion of loans and overdrafts. So when you look at $10 billion that is not (all) usable money, that's deposits.
"In that deposit, $4 billion are loans and advances to the private sector; secondly, there are Treasury Bills that have been purchased by the banks, individuals and corporates of $3 billion.
"Treasury bills are about $2,5 billion. So the other $1,2 billion to $3 billion are savings bonds that these banks and other corporates had purchased from the Reserve Bank of Zimbabwe.
"So our usable money, now called RTGS dollars in the accounts today as we speak is $1,8 billion, not $10 billion. Today we have US$451 million over and above the $150 million we have put in place.
"Let us assume we have US$500 million or US$600 million and if you add the US$450 million plus the US$600 million, that becomes US$1 billion," the central bank chief explained.
Dr Mangudya said if for instance the floated exchange rate was one US dollar to 3 RTGS dollars and US$600 million was injected into the economy, all RTGS balances would be wiped out from the market.
The central bank said banks and corporates, if that happened, would be left holding on to Treasury Bills and RBZ savings bonds only and would in fact require liquidity support from the RBZ.
He said such a scenario, to avoid further inflationary buildup of excess liquidity in the market; the central could simply raise interest rates to prevent borrowing for non-productive purposes.
Exchange rate driven prices drove inflation from 5,4 percent in September 2018 to 56,09 percent in January 2019.
"So, safeguards (are there), you can try (to temper with the system). The exchange rates are just going to go down. There is a limit to which a bank can lend money, depending on their balance sheet.
"There is also a limit to which you can borrow money from the market to go and purchase currency because they (banks) will hit you with interest rates. So, we think we have put a soft landing."
The central bank says it will monitor banks closely in the trading of currencies to deter collusion and manipulation to ensure exchange rates stability, honesty and fairness.
Dr Mangudya said the central bank will sit down with banks to indicate to them the direction it wants things to take. He also pointed out that soon banks will need liquidity cover from RBZ.
This will allow the bank to use tools at its disposal, such as the accommodation rate to control flow and amount of liquidity going into the bank to avoid putting undue pressure on exchange rates.
