If one ever doubted Dr. Denny Kalyalya and his team’s resolve to act, then CENTRAL BANK (CB) Circular No. 12/2019 serves as a reminder that Bank of Zambia knows when to step in when economic fundamentals bred stability concern.
On 14th November 2019, the central bank through its communication mechanism to commercial banks raised the Overnight Lending Facility (aptly known as OLF) to 17.75% above the prevailing Central Bank policy rate from 7.75%, according to the Circular signed by Dr. Francis Chipimo, Deputy Bank of Zambia Governor in charge of Operations.
According to the Central Bank, this decision takes the OLF to 28% and is aimed at instilling stability in the market and reigning in inflation pressure.
The central bank has always been watchful of the macro-environment as it is their mandate. Actors in the banking sector will remember analogous circulars during the financial debacle of 2014-2015 when the role of Deputy Governor once again acted on the stimulus of macro environment behavior.
Here is a collection of circulars that show the central bank acting in the interest of the economy.
In 2014, Dr. Tukiya M Kankasa announced a 10% above MPC OLF.
In 2015, Dr. Bwalya Ngandu announced changes in the OLF that limited Commerical Banks to access the facility only once a week.
In 2016, Dr. Kankasa announced sweeping changes that saw the one-week restriction being lifted with strict compliance condition.
In Q2 of 2019, prior to his appointment as Minister of Finance, Dr. Bwalya Ngandu announced a marginal increase in the OLF which was the first signal that Central Banks’ patience was reducing.
About OLF
The overnight rate is generally the interest rate that large banks use to borrow and lend from one another in the overnight market. Overnight rates are a measure of the liquidity prevailing in the economy. In tight liquidity conditions, overnight rates shoot up.