- There’s needs growth stimulus in light of anaemic growth as evidenced by softer PMI’s
- Inflation is fully reflective of fuel price hike and weak currency effects and still below MPR
- These factors override the rising cost of funding shown by secondary market kwacha curve
This week the Bank of Zambia will have its last rate decision meeting for the year 2018. Deliberations will commence on the 19 Nov. with stakeholders through to the 20 Nov. with the final announcement to be made on Wednesday 21 Nov. The BOZ bottomed on its interventions in February this year following a 575bps easing monetary policy over a year that say the key interest rate settle at 9.75% from highs of 15.5%.
Below are a series of key market events and developments that have occurred since the last rate decision meeting in August.
Rising inflation as a consequence of a higher fuel price hike given crude price bulls. ICE Brent futures flirted with highs of $76/bbl which triggered upward adjustment in pump prices of gasoline to kerosene by 16.8% – 21.1% respectively. This exacerbated a breach in the 6-8% targeted consumer price index (CPI) twice in August (8.1%) and October (8.3%) as cost push inflationary pressures from higher manufacturing and transport costs in a weak kwacha environment priced in. The kwacha slid to 37 -month lows breaching the K12.89/USD in the wake of rising dollar demand as a safer haven asset (dollar index was at its highest in the period) for value following a strong dollar environment backed by asset sell off pressure from waning sentiment from debt sustainability concerns.
A decision was made by law makers in Africa’s second largest producer, to have the mine remit mineral royalty taxes in dollars directly to the central bank, in a move to shore up reserves which had declined to $1.73bn (Sept.).
The kwacha term structure of interest rates (yield curve) is elevated in the long end with 9-month to 1-year yielding 20.5% and 23.56% respectively. This reflects a rising cost of funding which the secondary market has priced in an additional 600-800bps above the current the primary curve. This has made kwacha discount assets overvalued.
Bank of Zambia was in open market operations (OMO) most of the quarter to narrow the gap between the monetary policy rate (MPR) and open market operation (OMO) yields to tame demand pull inflationary pressures.
Private sector activity has been depressed in the last 3 months evidenced by the purchasing managers index (PMI) of below 50 (Aug- 49.1, Sept. 46, Oct-43.1). Despite the growth trajectory repprted for Q1 (2.7%) and Q2 (3.9%) by the Central Statistics Office (CSO) in its October bulletin, the PMI report by Stanbic Bank suggests the momentum for Q3 and Q4 will have some gains erased by softer PMIs that could threaten the targeted GDP growth.
Given the need for economic stimulus in light of a weak growth prospect (3.4% World Bank revised estimate vs. 4.1% MOF projection) coupled with a successful reign in inflation at 8.3% slightly below the current BPR of 9.75%, it is very unlikely that the BOZ will adjust rates in this MPC sitting.
