The Governor of the Central Bank Dr. Denny Kalyalya is this month end expected to announce the decisions of the monetary policy committee regarding the various economic indicators. Over the past few quarters the Financial Insight team has kept a close watch on the outcomes of the committee statements and has frequently predicted the MPC decisions based on their own analysis.
In Quarter 3 (2016) the annual inflation slightly declined to 18.3% from 21% which was 2.1% points lower than the end of Quarter 2. In October 2016 the inflation further declined to 12.5% while the year-to-date inflation was at 4.7%. The annual inflation in 2017 ended the second quarter at 6.8% up from 6.7% at the end of the first quarter. It is important to note that this fell within the medium term target range of between 6% to 7%. The sight increase in inflation was due to the raises in the electricity tariffs which were in May 2017 increased by 50% on average according to the third quarter 2017 statement.
Overall, when the nominal interest rates are lowered more individuals are able to borrow more money in turn causing the economy to expand and inflation to increase. However, the commercial banks nominal lending rates maintained an upward trajectory over the fourth quarter of 2016 despite a fall in inflation. The lending rates continued to show a wide range with the lowest lending rate in December at 10% (9% in September) and the highest rate at 41% (40% in September). The rising trend in lending rates showed the commercial banks preference to hold up funds in government securities hence reducing the amount of available loanable funds to private enterprises and households. According to the second quarter 2017 statement the nominal lending rates marginally declined to 26.6% in June from 28.8% in March. Concurrently, the lowest and highest lending rates declined 8%-37% range in June 2017 from 10%-38.5% in March 2017. Therefore, it is believed that the decline in the lending rates in this quarter reflected the further easing of the monetary policy (increased money supply) and the private sector credit indicated signs of recovery.
In the third quarter of 2018 the commercial banks average lending rates remind high despite declining to 23% in September 2018 from 24.3% in June 2018. The accommodative monetary policy stance adopted by the central bank during the 2018 period provided the banks an opportunity to lower their nominal lending rates. The significant changes in the interest rates and inflation over the past years did produce some strengths and weaknesses in the various domestic economic developments. For instance, in the fourth quarter of 2016 indicated that the economic activities carried on experiencing challenges with the production of copper and the generation of electricity declining. In 2017 based on the real sector indication data quarter three experienced improved economic activities with selected sectors such as manufacturing and energy recovering from the decline.
According to 2018 fourth quarter statement indicators for economic activity showed year-to-year growth with heightened downside risks. For instance, some of the visible downside risks to economic growth have being the high debt service payments, high government borrowing and the El Nino forecast in the 2018/2019 farming season. Conversely, the macro-economic outlook produced some great opportunities. The 2016, 2017 and 2018 quarter four statements indicated and maintained that positive growth would be underpinned by expected improved performance in the transport, construction and accommodation and food services (tourism) sectors. These improving external sectors will in the long run provide a favorable environment in supporting diversification and industrialization efforts under the “Economic Recovery Programme – Zambia Plus”.
The precise decisions of the monetary policy committee in the various quarters of different years are highlighted below according to their respective statements:
MPC decided to maintain the Policy Rate at 15.5% at its November 16-18, 2016 meeting. In addition, the Committee decided the following:
- Remove restrictions on banks’ access to the Overnight Lending Facility (OLF).
- Allow the banks’ automatic conversion of intra- day credit to overnight loans on the OLF; and,
- Extend the banks’ compliance to statutory reserve requirements from daily to the weekly average.
The MPC at its February 20-21, 2017 meeting decided to;
- Reduce the policy rate by 150 basis points to 14% from 15.5%
- Restore the overnight lending facility rate to 600 basis points from 1000 basis points above the policy rate”.
- Reduce the statutory reserve ratio by 250 basis points to 15.5% from 18%.
The MPC at its November 19-21, 2018 Meeting decided to;
- “ Keep the policy rate unchanged at 9.75%,with inflation expected to exceed the upper bound of the 6-8% target range in the first three quarters of the forecast period but to return within the target range and trend towards the mid-point of 7% thereafter”.
Over the past few quarters they has being a common trend in the key factors that help the committee make their decisions. These include the sluggish and low economic growth, the prevailing high lending rates and the decline in inflation. After a careful analysis of the various indicates the financial insight team believes that the overall economic growth may be lower than anticipated due to consistent negative business sentiments and fragile economic growth. Moreover, the commercial bank lending rate is expected to slightly increase “helping them recover axed bank charges” hence pushing up the cost of leading and conducting business. Overall, when consumers have less money to spend it cause the economy not to expand and the inflation rate to decline.
The Calendar for the remainder of 2019 following next weeks announcement will see Denny make the MPC statements on the following dates
- Quarter one 2019 (20-21 May 2019),
- Quarter two 2019 (19-20 August 2019) and
- Quarter three 2019 (18-19 November 2019) will be favorable to the economy and the consumers at larger.