The central bank in Africa’s second largest copper hotspot Zambia has for the second time this year hiked its benchmark interest rate by 25 basis points to 9.5%. This was according to an announcement by Governor Denny Kalyalya after a two day deliberation that commenced Monday 13 May. The monetary policy committee cites rising inflationary pressures that the decision will seek to tame.
The Bank of Zambia (BOZ) joined other peer central banks in raising rates in the wake of inflation with the first being in February after a year of keeping rates on hold. This was the second monetary tightening effort after a 250bps hike in the cash reserve ratio to 11.5% to stem a runaway currency. The decision on May 15 is the third significant action the central bank has made to manage price pressures. In an earlier survey done by the Kwacha Arbitrageur of 15 economists, 80% voted in favor of a 25-50bps rate adjustment higher with 20% for no change at all.
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The MPC communiques cites cost push pressures induced by uncertainty around delayed debt restructure causing currency volatility swings as the determinant for its decision. Zambia still faces a plethora of fiscal risks which are manifesting in the interest and foreign exchange trading markets. Private sector pulse headlined below 50 at 48.6 as lack of liquidity and price pressures persist. As measured by Purchasing Managers Index Zambia’s manufacturing activity was for the second time in contraction.
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Zambia’s inflation is forecast to average 10.5% and 8.4% in 2023 and 2024 compared to 11.1% and 10.1% in the central banks February forecast. The MPC communiqué reveals further that BOZ provided $377 million for critical import purposes of which $186 million was from mining tax receipts. Foreign currency reserves decreased to $2.9 billion (3.3 months of import cover) at end of March form $3.1 billion (3.8 months of import cover).
The Kwacha Arbitrageur
