A day after the second rate hike of the year 2021, a 50 basis points tightening in the benchmark interest rate, Zambia’s Consumer Price Index (CPI) ebbed 180 points lower to 19.3%. This according to the Zambia Statistics Agency (ZSA) was attributed to a 2.7% deceleration in food prices in parallel with and a 1.0% slow down in non – food prices. This is the lowest inflation since December 2020. On a monthly basis, consumer prices were up 0.6%, after a 0.4% increase in the prior month.
The copper producer, has for a year grappled with elevated inflation as a consequence of pandemic induced currency risk pressure stemming from an asset sell-off capital flight to safety scenario in uncertain times. This transmitted cost push inflationary strains into the ecosystem adding to demand pull pressures exacerbated by excess Kwacha liquidity from quantitative easing stimulus measures in a COVID pandemic era meant to cushion against deteriorating credit risks. This scenario is systematic across the globe with most nations battling with inflation post the pandemic. Dr. Denny Kalyalya in his debut rate decision announcement tightened rates with the intent of curbing inflation to tame it within the 6-8% target band by 2023.
AN UNDERWATER ‘SHORT END’ GOVERNMENT SECURITIES MARKET
The government securities market continues yield lower (higher prices) on the back of greater demand for bills and bonds on from both offshore and onshore players seeking yield to house excess liquidity in an ultra thin rate rate environment. This is supported by improved sentiment from subsiding political risks in the wake of a new government and greater political will from the authorities to restore fiscal fitness by engaging multilateral partners more transparently thereby aiding a stronger confidence claw back.
READ ALSO: In Last MPC of 2021, Kalyalya Hikes Rates 50bps To Tame Inflation
However premiums for investing in treasury bills remain negative as inflation is currently over 900bps above returns on investment on short term government risk making the assets unattractive.
THE GLOBAL FOOD INFLATION CRISIS WILL BE THE BIGGEST THREAT TO REALIGNING INFLATION
Given the central bank governors target of 2022 to align inflation to single digit and 2023 within the 6-8% target band, upside risks to CPI remain high from elevated food prices globally and supply disruptions in the wake of a 4th COVID wave. Inflation is said to be the crisis of 2022 as most nations manifest effects of the global stimulus programs in the pandemic periods and to curb the vice, it is expected that the world will see more rate hikes than usual. However on the positive this global inflation quagmire could extend the bond rally in emerging markets until central banks fully reign in on consumer price index.
Other threats to inflation on the horizon could stem from potential fuel and electricity price hikes should the state scrap subsidies in the quest to reallocate resources to other productive sectors of the economy. Zambia is currently on a recovery path in the labyrinth of a debt restructure and a scarce resource purse.
The Kwacha Arbitrageur