In a move that many economists and financial watchers were anticipating, the Central Bank announced a 150 basis points (1.5%) increase in the policy rate on Wednesday 20th November moving the policy rate to 11.5%, following a disturbing run of accelerating inflation and weakening currency.
“At its meeting held on November 18 – 19, 2019, the Monetary Policy Committee decided to raise the Policy Rate by 125 basis points to 11.50%”, according to statement read by Dr. Denny Kalyalya, Governor of the Central Bank on Zambia to the media on 20th November 2019 following the Monetary Policy Committee meetings held two days prior.
Currently faced with the real prospect of decelerated inflation, the Central bank arrived at its decision largely due to the accelerating inflation and the threat it posed on economic fundamentals.
“The rise in inflation with projections indicating inflation remaining above the upper bound of the target range over the entire forecast horizon (Q4 2019 – Q3 2021) as upside risks to inflation have heightened and some of them have materialised “, advised the Governor. “The need to restore macroeconomic stability”.
The Central Bank has been a hotspot over the last fortnight. In the week prior to the MPC meeting, in a circular to all commercial banks announced the revision upwards of Overnight Lending Facility (OLF). “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 an earlier article published on this website.
The Governor also indicated that it was clear the risks that had been anticipated had begun to appear. “The risks, which manifest through the expectations and exchange rate channels, include persistent high food prices, electricity shortages leading to extended load shedding, slower than anticipated progress on fiscal consolidation and high external debt service payments”.
The MPC know that the policy tool at their disposal is not enough to curb economic woes. “The Committee recognises that to address the prevailing economic challenges, monetary policy actions alone are not sufficient”. Furthermore, they maintain their rhetorical position on the rational cure. “They (policy actions) needs to be complemented by the implementation of corrective measures by fiscal authorities and other key public policymakers”.
Readers of this article should expect SMS messages from their respective banks on this announcement as they prepare to ramp up interest rates before Christmas following the announcement.