The central bank in Africa’s red metal hotspot hiked rates 25 basis points to 9.25%, the first rate adjustment in 1 year as price pressures exacerbate. This decision comes barely a fortnight after the Bank of Zambia widened its statutory reserve ratio by 250 bps to 11.5%, the first monetary tightening since December 2019. Zambia was one of the emerging market economies that seemed to have tamed inflation for a over a year compared to its peers supported by a rallying currency as sentiment gushed into the Southern African nation post August 2011. Governor Denny Kalyalaya announced the benchmark rate increase on Wednesday February 15, after a two day rate decision committee deliberation that commenced on February 13 – 14.
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“The Monetary Policy Committee at its February 13-14 2023 Meeting decided to raise the monetary policy rate by 25 basis points to 9.25%. The decision was underpinned by the projection that inflation will remain above the 6-8% target band. This is in sharp contract to the November 2022 projection that showed that inflation would return to the target range in the first quarter of 2024. The underlying factors in the current projection include: the recent rapid depreciation of the Kwacha against the US dollar, the anticipated increase in electricity tariffs to cost reflective levels, the possible reduction in maize production, continued tightening in global financial conditions, and negative sentiments arising from protracted debt restructuring negotiations and uncertainty over how government securities held by non-residents will be treated,” The MPC communique carried.
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Amidst global ambiguity, uncertainty and volatility, Zambia remains one economy that is exuding signs of resilience despite fiscal hurdles as it debt restructure process delays. Market fatigue has themed the currency market with the copper currency completely shaving the 2021 outcome sentiment induced gains to breed cost push pressures in the petroleum markets while the state utilities application to the energy regulator to hike tariffs is a key threat to inflation targets. The copper producer has had a fair share of floods as precipitation heightens posing food security threats through crop damage.
Zambia’s money markets will experience liquidity squeeze that could signal higher yields on government securities to raise term funding costs in addition to a 25 bps widening in credit costs effected by the MPR adjustment.
“Zambia’s debt composition is a depiction of the geopolitical landscape and as such restructure will be at the mercy of China and the west to agree. Until then, ambiguity will marr the market and the economy could start to take a negative cue from the delay as having been observed. The right hiking cycle was bound to happen, it was just a matter of time.,” ZATU Financial Consultants Managing Partner said. The signs were all in the sky with bad loans ration of 5% the lowest in history, currency woes and other supply chain related price pressures he said.
Despite the central bank offloading circa $443.5 million on the open market in 4Q22 compared to $333.5 million the currency still slid to just under K19.5 for a unit of dollar. The currency has been a function of agriculture seasonal demand, increase in imports as the economy grows and above all asset sell off pressure in very uncertain world. As global ambiguity persists liquidity continues to find a home in dollar denominated assets such US treasuries and gold as safer haven mediums.
The Kwacha Arbitrageur