Zambia’s monetary policy rate goes up

Zambia’s monetary policy rate goes up

The Monetary Policy Rate has been adjusted upwards by 50 basis points to 8.5%.

Bank of Zambia Governor Christopher Mvunga says the Monetary Policy Committee has decided to adjust the rate upwards by 50 basic points.

Mvunga said this has been necessitated by the escalation in inflationary pressures, which are pushing inflation further away from the upper bound of the 6 to 8% target range.

“The decision balances the need to contain rising inflation and anchor inflation expectations against the efforts made to support financial system stability and growth. Ensuring that inflation remains well anchored in the medium-term is essential to moderate fragilities in the financial sector and support economic recovery. In addition, the implementation of a strong fiscal policy adjustment, whose key parameters are clearly outlined in the Government ‘s Economic Recovery Programme, is critical in restoring macroeconomic stability,” Mvunga said.

He, however, said a strong rebound to 5.5% in 2021 is projected.

“This recovery is on the back of policy support and the gradual easing of restrictive measures owing to the anticipated widespread COVID-I9 vaccination. In the medium-term, growth is projected to be uneven and highly uncertain contingent on the extent of economic damages, effectiveness of policy support and severity of the current health shock. Indicators of domestic economic activity point to a less severe contraction, but weak recovery projected in the medium-term High frequency indicators of domestic economic activity point to a less severe contraction in real GDP in the last half of 2020 following the partial relaxation of COVID-19 restrictions. Nearly all the monitored indicators in the Bank of Zambia Survey of Business Opinions and Expectations improved over the third quarter readings,” Mvunga said. “In addition, the Stanbic Bank Zambia Purchasing Manager’s Index, also signalled a softer deterioration in the private sector business environment.”

Mvunga said the uncertainty surrounding the resurgence of COVID-19 infections and the narrow fiscal space pose significant downside risks to this growth outlook.

He said the annual overall inflation accelerated to a four-year high in the fourth quarter of 2020.

“This was largely driven by the sustained depreciation of the Kwacha, reduced seasonal supply of some vegetables and the fish ban. Inflation rose to a quarterly average of 17.6% from 15.7% in the preceding quarter. Food inflation averaged 17.2%, up from 15.2% while non-food inflation rose to 18.0% from 16.2%. Inflation increased further to 21.5% in January 2021 trom 19.2% in December 2020. Over the next eight quarters, inflation is projected to deviate further away from the upper bound of the 6-8% target range due to the lagged pass-through from the depreciation of the Kwacha and sustained high fiscal deficits,” Mvunga said.

“The risks to the inflation outlook are assessed to be tilted to the upside. Inflation is bound to accelerate further if crude oil price increases persist, fiscal deficits turn out to be higher than projected and the exchange rate depreciates further. Inflation may be maderated by improved supply of food and subdued aggregate demand as economic growth is likely to remain modest.”

He noted that the interest rates have continued to decline.

“Market interest rates continued to trend downwards, influenced largely by the accommodative monetary policy stance. The commercial banks’ average lending rate declined to 25.1% in December from 25.7% in September. The savings rate for 180-day deposits also reduced to 9.8% from 10.3%. Similarly, the composite yield rate on Treasury bills declined to 21.2% from 22.7%. The composite Government bond yield rate, however, rose to 32.9% from 32.3%, reflecting weaker demand for longer-dated instruments.”

He explained that the fiscal pressures remained high as revenue fell due to the COVID-19 shock amidst rising expenditures especially on agricultural inputs, health and clearance of arrears.

“Fiscal consolidation remains challenging given the significant uncertainty about the evolution of escalating COVID-19 infections and the debt restructuring process. Narrowing the fiscal deficit by ramping up revenue whilst rationalising expenditure, and restructuring of Government debt remain critical to restoring fiscal and macroeconomic stability. Securing external sector support will be central to this effort.”

He said to respond to the depreciation of the Kwacha, the Bank of Zambia scaled-up interventions to moderate pressure on the exchange rate.

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