For investors seeking yield on Kwacha government securities, real returns ebbed 150 points as Consumer Price Index for May was reported 1.5% wider to an 18 year high at 23.2%. This comes barely a month when inflation ebbed infinitesimally by 0.1% to 22.7% misleading the market around a potential peak and genesis of a downward trajectory. Key drivers as reported by Zambia Statistics Agency, were a climb in the price of beef and fish causing a rise in the food portion of the CPI.
Annual food inflation rose 1.3% to 28.5% whose velocity surpassed that of non – food side that ebbed 0.4% to 17.1%. The increase in food inflation was attributed to an uptick in fish
Inflation in the copper producer has been outside the central bank target band of 6-8% and is expected to realign within the next 8 quarters as announced by the Bank of Zambia Governor Christopher Mvunga in the second rate decision meeting of the year 2021. The rebound in upward spike throws the Kwacha treasury bill curve underwater widening negative returns for all tenors save the one year whose premium narrows to 255 basis points above May inflation.
An uptick in inflation could be counter intuitive to keeping the benchmark interest rate unchanged as was held in the May 17-19 committee meeting. The Bank of Zambia kept rates tad at 8.5% on the back of an improved forecast over the next quarters.
Zambia is in the labyrinth of a debt restructure following a series of dollar bond coupon defaults in the shadow of bailout with the Washington based lender the IMF. The copper producer is one of the African nations heading to the polls this August as the World grapples with a COVID pandemic. Inflation pressure is expected to ease following a successfully crop bumper harvest announced in the 2020/2021 season while currency cost push pressures could ease as copper price rally improves the countries foreign currency posture.
The Kwacha Arbitrageur