MPC @ Q4 – Denny Signals Reversal
Economy, Opinion
Dr. Denny Kalyalya BoZ Governor

Dr. Denny Kalyalya and his team of economists held the final Monetary Policy Committee (MPC) meeting for the year 2018 on November 19 to 20th. Judging from the statement he issued following the deliberations of his high council, Denny will have a lot on his mind when he sits down for Christmas dinner at the epilogue of the year. The reason for this is that should inflationary pressures continue to weigh heavily, he knows MPC’s first decision next year will be a northward adjustment.

The financial year in itself has been an interesting one. We opened the year with the first MPC statement that echoed the following:

“The BoZ Policy Rated reduced by 150 basis points to 14%, the Overnight lending facility (OLF) rate reduced to 600 basis points above the Policy Rate and the Statutory Reserve Ratio reduced by 250 basis points to 15.5%.

Then in May 2018, the MPC decided to maintain the policy rate at 9.75%. According to their published statement on the central bank’s website:

“After trending downwards for seven consecutive quarters, annual overall inflation edged up in the first quarter of 2018, but remained with the 6-8% target range. Inflation rose to 7.1% in March 2018 from 6.1% in December 2017, driven by what the central bank believed was the upward adjustment in fuel prices and the subsequent increase in transportation costs, as well as seasonal reduction in supply of some food items, particularly vegetables and maize grain”.

Then August 2018 came along and MPC decided to keep the policy rate unchanged at 9.75%. They declared that:

“Despite edging up further in the second quarter, inflation remained within the target range of 6-8%. Annual overall inflation, at 7.4% in June 2018, was higher than the 7.1% recorded in March 2018, on account of the reduction in supply of selected food items, general increase in transportation costs, and the depreciation of the Kwacha against the United States dollar”

What is interesting at this point was that Denny and his team of economists begun signalling a weakened position in the inflation fight. This is seen from their admittance that with some of the upside risks indicated in their May 2018 MPC Statement having materialised, inflation was then projected to remain above 7.5% in the second half of 2018. In addition, they also expressed some optimism based on Q3 forecasts that they projected inflation to slowdown and remain anchored around the mid-point of the 6-8% target range over the remainder of the forecast horizon (which is Q3 2018 to Q2 of 2020).

Thus far in 2018, higher than programmed fiscal deficits, rising public debt, sluggish credit growth, and elevated non-performing loans (NPLs) were seen to pose a downside risk to broader and robust economic growth are echoed in each of the MPC statements emanating from the central bank.

In his final statement for the year, Denny and his team indicated that they decided to maintain the Policy Rate at 9.75%. Furthermore, they stated that:

“Although inflation is projected to exceed the upper bound of the 6-8% target range during the first three quarters of the forecast period, it is expected to return to the target range thereafter.”

The statement further indicated that:

“As some of the upside risks identified in the August MPC meeting materialised, inflation continued to rise and ended the third quarter just below the upper bound of the target range. Annual overall inflation rose to 7.9% in September 2018 from 7.4% in June 2018, largely reflecting higher prices of some food items and the depreciation of the Kwacha against the US dollar.”

With oil procurement being the leading cause of the exodus of greenback, in Q3, causing the 19.5% tumbling of the kwacha against the dollar which was exacerbated by the hike in the US Federal Funds Rate and sustained negative market sentiments arising from the downgrade of Zambia’s credit rating. In addition, Denny is also seeing further depreciation in Gross International Reserves (GIR) which declined to US$1.63 billion at the end of Sept 2018 (representing 1.9 months import cover) from US$1.82 billion (2.2 months import cover). Currently, the strategy in place to replenish the reserves is to purchase foreign exchange directly from the market and through the mineral royalty tax receipts.

Although the final MPC decision for Q4 was to hold rates, the central banks crystal ball projects inflation to exceed the upper bound of the 6-8% range in the first 3 months of the forecasted period. With decisions around the Policy Rate being guided by inflation forecasts, Denny’s closing statement indicates that the Central Bank will consider an upward adjustment should the heightened risks to inflation materialise in order to keep inflation within the 6-8% range.

Financial Insight believes that local commercial lenders will be waiting with anticipation on the MPC’s first decision of 2019. In the meantime, the hope of having a reduction in lending rates will now be put on ice as all eyes are firmly on inflation.


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