The monetary policy committee has maintained the policy rate at 10.25% which will see lending institutions not adjust their lending rates in a market economy that is now faced with accelerating inflation and depressed economic activity.
“At its August 19 to 20 th 2019 meeting, the MPC decided to keep the Policy Rate unchanged at 10.25%”, read the statement from the Dr. Denny Kalyalya at the MPC press briefing held at the Central Bank in Lusaka. “The MPC noted elevated inflationary pressures in Q2, and projected inflation remaining above the upper bound of the 6-8% target range for much of the forecast horizon, but expected to revert to the target range towards the end of the forecast horizon”.
The key factors that influenced the decision included the need to reign in inflation, address liquidity challenges and risks to financial stability. Zambia’s inflation is now above the targeted range of 6 to 8%. The escalating prices of food items have been one of the biggest influencers of the currently experienced accelerations. “Upside risks are judged to dominate the inflation outlook, and if they materialise, may lead to higher inflation outcomes“, further noted the Governor who is clearly concerned by the upside risks inflation pose.
With the a substantial amount of inputs into the local economies industrial value chain being imported, accelerating inflation has negatively impacted industry whose costs have been increasing leading to reduced confidence in purchasing managers that has seen the PMI below the target range of 50 for most of 2019. Ironically, when compared to its major import partner, South Africa, their PMI is also below 50 signally ubiquitous weakened economic activity.
At its May 2019 meeting, the MP Committee decided to raise the Policy Rate by 50 basis points to 10.25%. This is when Central bank disclosed to the public that they projected that Inflation would breach the upper bound of the 6-8% target range over the second quarter of 2019 to the first quarter of 2021.
The Central Bank making the August decision is consistent with the guiding principles of the central bank in this period of accelerating inflation.