When Governor Dr. Denny Kalyalya announced the 3rd quarter monetary policy position to further reduce rates for the second time this year, many economists who had predicted a “hold” were caught off guard. Like all professionals, economists are rational beings and in this particular case “most” of the data indicated that a hold would be the best decision (all things being considered). But not this time.
But passively observing some of the statements that have come from the Governor in the past, the decision to reduce rates is consistent with what we now understand is this MPC’s belief system on the Zambian economy.
In the spirit of “do no harm”, we have noted that since the second announcement of the year, the Governor and his team have been open about some of the data that they use in coming up with a decision. 2020 will go on record as the year MPC showed that it listened to the pulse of the economy and that fiscal concerns were not the only thing on their minds as was echoed in most of 2019 MPC statements. Evidence of this is in the Governor, now twice in a row, making reference to Stanbic’s Markit MPC report and the in house Bank of Zambia business survey which both indicate that MPC had to take not of the business pulse and that had to be reflected in the decision that they made.
Clearly, COVID-19 was also the elephant in the room as it was the first bullet point in the Governors presentation. “The need to safeguard financial stability, people’s lives and livelihoods in the wake of the COVID-19 pandemic” was one of the reasons for the decision to reduce the policy rate by 125 basis points.
“Results from the Second Quarter 2020 Bank of Zambia Quarterly Survey of Business Opinion and expectations indicated worsening economic conditions with all monitored indicators showing deteriorations, except for new orders, largely due to increased demand for pharmaceutical products used to fight COVID-19”.
With interest rates not easing as fast as many commenters had hope, it is clear to see why they had anticipated a rate hold. However, the weighing Governor Denny’s passion of reigning in inflation over interest rates indicates that inflation tops all. Until COVID-19, the central bank moved in tandem with the movement of inflation.
“Although projected to remain above the upper bound of the 6-8% medium-term target range, inflation is expected to steadily decline, reaching the upper bound by the end of the forecast horizon”. The forecast horizon or period that the Governor refers to here is eight quarters ahead, that is, counting from this current quarter, the Central Bank expects to see inflation reduce to 8% by the end of the second Quarter of 2022.