Zambia’s central bank on 22 May announced a 50 basis points to 10.25% signalling the first rate hike since December 2015.
Against all odds, Governor Denny Kalyalya limited the rate hike to 50 bps and left the stat reserves at 5% attributing his decision to the rising credit risks in light of the deteriorating fiscals stressing the need for realignment. Kalyalya kept track of the rising risks to inflation which his team forecasts will breach the 8% upper bound of the BOZ targeted range of 6-8%.
The Governor attributed the currency slide to speculative drivers on the back of waning sentiment and increased dollar demand for petroleum products. The Kwacha hit a 42 month low on Friday 17 May closing at 14.2 for a unit of the safe haven currency. Other drivers of the rate decision meeting announcement are the widening of weighted average yields on treasury bills to 22.60% (from 21.4% prev.) and 24.6% (from 20.1% prev.).
Read also: Hiking rates to curb a Kwacha slide versus private sector growth – Pre MPC Analysis
MARKET COMMENTARY
From the Governors tone in the note it is vivid that the central bank has very limited options for further stimulus to give already waning private sector growth a boost. Suffice to say monetary policy has bottomed with the reserve ratio at 5% and benchmark rate previously at 9.75% but now 50 bps higher at 10.25%. The rate hike in our opinion is not sufficient to address the currency risks which continue to put the Kwacha under pressure. It is comforting for the central bank to finally forecast inflation higher than 8% which for a long time has been downplayed but the risks to Zambia point to a ballooning CPI in the medium term. Drought effects and currency depreciation impact on imports will adversely impact the macros. A weak global macro backdrop does not make it any easier to manage currency risks as the dollar is in reign mode for 3-6 months fueled by uncertainty as an autopsy of the US-China trade impasse, Brexit all pointing to weaker aggregate demand. In such times the offshore players prefer dollar denominated assets as safe havens for investment.
Today’s MPC was the genesis of a rate tightening cycle off-course guided by the fiscal latitude, in the subsequent months to come. We forecast another rate hike this year. We expected a higher hike than 50 bps but like said in our earlier analysis that credit behavior remains driven by elevated government security yields which have spiral effect on the cost of funds. The interest rate environment remains bearish.
NEED FOR MARKET ASSURANCE: There is need for the Bank of Zambia to reassure the markets frequently in times of volatility to help allay players fears lest speculation breeds. It is recommended that the Governor comments on developments in the macroeconomy more frequently than usual to allow players pick clues as to drivers of variables.
T-BILL AUCTION – The Bank of Zambia will have its thirteenth treasury bill debt sale of the year on 23 May with K950 million on offer.
Written by Oscar Meeander
