The Bank of Zambia, the country’s central bank, recently made its first monetary policy pronouncement in the year 2021. From a backdrop of a runaway inflation rate and dwindling business activities, the Central bank opted to adjust the monetary policy rate by 50bps from 8% to 8.5%. This move comes after a series of policy rates cut down that started in early 2020. According to Bloomberg, “this was the first increase since November 2019 and follows tightening by its eastern neighbour, Mozambique, last month”.
The central bank cites, projected rise in inflationary pressures, weakened demand for government securities, excessive growth in money supply, current account surplus reduction as well as the continued depreciation of the Kwacha, as among the factors that have necessitated this move.
The economic outlook for the month of January 2021 shows an increase in the annual rate of inflation to 21.5% with business activities dwindling, as indicated by the monthly PMI of 47.7 index points. The domestic currency to date has continued to depreciate, trading above K21/US$ for some time now.
The past policy rates adjustments, in the year 2020, have been downward with the exception of the last quarter of 2020, where the monetary policy makers opted to maintain it at 8%. The rate adjustments of that period were influenced mainly by the Covid-19 pandemic.
The upward adjustment will no doubt been unfavorable for retail and commercial customers who have been adjusting to the new normal. Accelerating inflation now means that competition for already strained resources will be intense. No doubt the banks will act swiftly to increase interest rates.
The Central Bank’s move is highly dependent on how well the fiscal program for recovery is implemented. “In addition, the implementation of a strong fiscal policy adjustment, whose key parameters are clearly outlined in the Government’s Economic Recovery Programme, is critical in restoring macroeconomic stability”, read the Governors statement.
However, the fiscal side of the economic equation is not without its own challenges as noted by the Central Bank. “Fiscal pressures remained high as revenue fell due to the COVID-19 shock amidst rising expenditures especially on agricultural inputs, health and clearance of arrears. Fiscal consolidation remains challenging given the significant uncertainty about the evolution of escalating COVID-19 infections and the debt restructuring process”.
Conversely, the move by the Central Bank to adjust the policy rate upward is likely to increase the return on government securities and consequently boost the demand. As to whether it will effectively arrest the continued rise in inflation and depreciation of the Kwacha, only posterity will tell clearly.