Following deliberations for the second rate decision in Africa’s second largest copper producer Zambia, Dr. Denny Kalyalya the Bank of Zambia head announced a 225bps rate cut to 9.25% on Wednesday 20 May. A forecast by the Kwacha Arbitrageur, amidst rising inflation last recorded at 15.7%, the central bank decided to prioritise growth as COVID19 stings the copper producers economy. The Bank of Zambia remains alive to inflationary pressures and will address them with its presence in Open Market Operations – OMO.
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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 levelled 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 anaemic with only K3billion of applications so far, the Minister of Finance carried in Sunday interview on state television.
The downward adjustment to the benchmark interest rate by 225bps reverts the benchmark interest rate to where it was the first time the policy rate was introduced in Zambia. The first ever interest rate was 9.25% and the central bank exercised exceptional justification to slide back to that level.
Credit risks remain elevated in the Zambian market evidenced by a rising Non-Performing Loan – NPL stock of 10.3% in breach of the 10% prudential limit. Lowering the benchmark interest rate will thus accelerate the downward shift in lending rates which the Medium Term Emergency Refinance Facility is expected to achieve but for the low uptake by commercial banks. Average Lending Rates – ALR remain elevated at 28.3% (April) while the government security curve is elevated at 29% for 1-year treasury bills and 33% for 5 -year bonds.
The Statutory Reserve Ratio – SRR remains unchanged at 9%. The implications of this rate cut is a repricing of all MPR linked credit facilities including the Medium Term Emergency Refinance Facility by 225bps.
The Kwacha Arbitrageur and the Cynical Investor