Real yields on Kwacha treasury bills have been drowned a further 230basis points (bps) as January inflation numbers jumped to 21.5% from 19.2% in December last year. According to the Zambia Statistics Agency (ZSA) inflation for January jumped to 21.5%, the highest inflation number seen since April 2016 (57months ago). The uptick was attributed to rise in food prices offset by a mild slow down in non-food prices.
Inflation has been on climb since August 2020, widening 600bps to date as effects of a currency rout intensified transmitting in end user (consumer prices). This rally in CPI makes real yields on treasury bills more negative as the 3m-9m tenors all fall below the 21.5% inflation mark. The one year T-bill rate now remains 425bps above inflation at 25.75%.
COULD INFLATION SIGNAL A BENCHMARK INTEREST RATE HIKE?
Barely a month to the first rate decision meeting of the year 2021, the signs in the sky point to a benchmark interest rate hikes given pressure on interest and exchange rate. Widening inflation sending yields underwater is usually a sign of a soon coming curve correction if the central bank has to move in make assets attractive to investors. Exchange rate risks have still persisted in the Zambian market space with widening backlogs causing strife in economic activity especially the Oil Marketing Companies (OMCs) that struggle with petroleum procurement causing shortages.
The policy rate was exceptionally lowered to 8.0% the lowest ever since the BPR started being tracked in 2012, only because the BOZ needed to absorb COVID induced credit risk by making credit obligation ease 350bps in total in a disease pandemic year. That explains why the regulator hard a difficult time sealing the lead on depreciation of the currency in extraordinary times. However all odds point to an eminent rate hike if the central bank is thinking price stability in this 2021.
The Kwacha Arbitrageur
