Zambia’s central bank raised its policy rate by 50 basis points to 10.25 percent and warned it may have to raise rates further if “upside risks to inflation persist and keep inflation above the target range.”
It is Bank of Zambia’s (BOZ) first rate hike since November 2015 and the first rate change since February last year when the central bank paused after cutting the rate 5 times by a total of 575 basis points since February 2017.
Today’s rate hike comes after the bank three months ago warned it may have to tighten its policy if inflation looked to exceed its target range of 6.0 to 8.0 percent.
Zambia’s inflation rate rose to 7.7 percent in April from 7.5 percent in March due to the pass-through from a fall in the kwacha and higher prices of maize and its products and BOZ now projects inflation will exceed the upper bound of its target range during the next 8 quarters to Q1 2021.
“Lower maize output, continued elevated fiscal deficits, high debt service payments, and the decline in gross international reserves are among the key upside risks to inflation,” BOZ said, adding these factors have also exerted pressure on the exchange rate.
In late 2015 Zambia’s kwacha tumbled on low copper prices and a poor harvest, boosting inflation to almost 23 percent in February 2016. But the central bank’s tightening campaign, a rebound in copper prices and better harvest helped shore up the exchange rate and push down inflation.
But fiscal deficits remain large and debt service has been rising, taking their toll on growth, which the International Monetary Fund in April forecast would slow to 2.3 percent this year from 3.7 percent last year due to the impact of drought on agricultural output.
“Indicators of economic activity point to subdued economic growth during the first quarter of 2019,” BOZ said, with mining output, cement production, consumer spending and tourist arrivals all showing negative growth.
In the first quarter of this year the kwacha remained relatively stable but from April 1 to May 17 it fell by 14.9 percent to around 14.0 per U.S. dollar, with BOZ attributing this to elevated demand for petroleum products, reduced supply of foreign exchange and negative market sentiment.