Deliberations for the second rate decision in Africa’s second largest copper producer Zambia commenced on the 18 May through which an announcement for monetary policy direction will be made on Wednesday 20 May. Dr. Denny Kalyalya, the Bank of Zambia head will surely have a tough call to make amidst rising inflation last recorded at 15.7% while the economy shrivels as COVID19 effects transmit to the business ecosystem. Central bank monetary policy models are inflation based but the Bank of Zambia May this time prioritize growth at the expense of the bigger evil, inflation.
Zambia’s growth forecast is pegged at 3.5% recession for 2020 according to International Monetary Fund projections but the Kwacha Arbitrageur in its Market Note dated 18 May forecasts a more optimistic weak but positive growth of stimulus measures leveled by the Bank of Zambia are effectively executed. The central bank offered a K10billion life line in credit to commercial banks in emergency situations whose uptake is believed to still be anemic with only K3billion of applications so far, the Minister of Finance carried in Sunday interview on state television.
The Kwacha Arbitrageur, the Markets and Economics arm of the Telegraph forecasts a downward adjustment to the benchmark interest rate within a latitude of 250basis points from 11.5% stating the need for the central bank to signal the need for rates to climb down in a suppressed environment. The first ever interest rate was 9% and the central bank could have exceptional justification to slide back to that level, the Arbitrageur said. However the market note did leave allowance for a rate tad position (unchanged) at 11.5% if the April stimulus is still be allowed to effect and price fully into the markets. The Bank of Zambia committed to funding liquidity in Open Market Operations – OMO.
The Arbitrageur further acknowledges that the MPR is an aesthetic metric whose adjustment may not result in effectively drop in rates especially that commercial banks reprice off government security curve which is elevated currently. Thus said, the Bank of Zambia are more likely to use the 100bps pricing above the MPR in Medium Term Emergency Refinance Facility to climb the yield lower to effectively lower rates.
The inflation environment remains elevated as pressure on the non-food side of the CPI persists.
The Kwacha Arbitrageur