When Bank of Zambia Governor Dr. Denny Kalyalya took to the podium to announce the decision of his Monetary Policy Committee at Q2, one could sense that prevailing macroeconomic indicators would have an influence on the decision of the committee.
In the build up to the Q2 presentation, Financial Insight had been tracking the exchange rate and the inflation (Consumer Price Index) changes. The Kwacha against the Dollar has been a frosty affair in Q2 as the local currency moved by 17.58% from January to May. Inflation rate continued to hoover just below the upper bound of 8%.
“Inflation is projected to breach the upper bound of the 6-8% target range over the forecast horizon due to heightened upside risks, some of which have materialised”, read the MPC statement issued by the Governor on 22nd May. “A build-up of inflationary pressures in the economy, with inflation projected to remain above the 8% upper bound of the 6-8% target range over the next eight quarters”
A review of the Central Statistics Office April 2019 monthly report revealed that inflationary pressure on Food items weighed heavily on the rate. April recorded food inflation at 8.3 which is beyond the upper bound that the Central Bank had hoped for. However, a closer look at the report issued by CSO shows that the following were the main drivers of increasing annual rate:
- Food and Non-alcoholic beverages
- Housing, Water, Electricity, Gas and other Fuels
- Health
- Transport
- Restaurant and Hotel
- Miscellaneous Goods and Services
On the other hand, the main drivers of reducing the annual rate included:
- Alcoholic beverages and Tobacco
- Furnishing, Household Equipment and Household Maintenance
- Recreation and Culture
- Education
Therefore, an upward adjustment in the Policy rate was intended to counter inflationary pressures and support macroeconomic stability, according to the Bank of Zambia Governor. Conversely, the Governor also cautioned on the forecast risk that lay ahead. A build-up of inflationary pressures in the economy, with inflation projected to remain above the 8% upper bound of the 6-8% target range over the next eight quarters, he further stated. In addition, heightened volatility in the exchange rate of the Kwacha against major foreign currencies had the potential to further increase inflation.
On the other end of the economic equation, slow progress towards fiscal consolidation as reflected in rising domestic arrears, public debt and external debt service payments. All these would require prudent management in order to weather the headwinds that lay ahead if not addressed.
MPC is an economic event that needs to be understood by all players in the economy. Although it is tradition for the Governor to make the announcement to the press, this years Q2 Annoucement would also see the Governor meet key stakeholders at an intimate breakfast where he would explain they key variables of MPC as well as it’s implications to businesses.
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This article is sponsored by the Bank of Zambia