Zambia Central Bank Tightens Rate to Restore Economy and Fight Inflation
Economy, Opinion

Efforts to contain escalating inflationary pressures and support currency influences Central Bank of Zambia policy decision. Does hiking rates mean a setback to fighting inflation? Is the Zambian economy on its journey to recovery?

Owing to these efforts, the Bank of Zambia’s monetary policy committee left rates unchanged despite persistently high inflation. It also expects that inflation will remain within, but in the upper bound of its 6-8% target range. However, the Bank remains committed to adjusting the Policy Rate upwards should the disinflationary process be slower than expected.

Year-on-year inflation declined marginally by 0.2% to 24.4% in August, remaining three times higher than the top of the central bank’s target band of 6-8%. It is only slightly below the record high 24.6% recorded in July.

Governor Charles Mvunga issued a monetary policy statement arguing that the outlook would improve.

According to the monetary policy statement, the central bank of Zambia left its key interest steady at 8.5% on September 1st, to support financial stability and growth, allowing the last rate adjustment to take full effect on the economy. The real GDP is projected to grow by a modest 1.6 percent in 2021 and strengthen over the medium-term, while the inflation rate is expected to decelerate faster than earlier projected but to remain above the 6-8% target range over the next eight quarters. Inflation is estimated to average 22.6 percent, 15.5 percent and 11.9 percent in 2021,2022, and the first half of 2023, respectively. Finally, the bank’s governor said an agreement on an IMF lending programme and stronger fiscal adjustment remained critical for Zambia to restore macroeconomic stability. Zambia failed to keep up with international debt servicing payments in November, becoming the first African nation to default on its debt in the pandemic era.

Additionally, in the February 2021 Monetary Policy Committee (MPC) statement report, the Bank of Zambia signalled its intention to progressively tighten monetary policy stance in order to bring escalating inflation back to the 6-8% target range and anchor inflation expectations over the medium-term.

“Considering the high overall inflation, any adjustments to the policy rate should be upwards to arrest demand pressures and moderate inflation in the medium term. It is our considered view that the current macroeconomic environment provides the scope for BoZ to enhance its focus on containing the rising quarterly inflation and anchor inflation expectations against the efforts made to support financial system stability and growth,” read a statement Issued by Mr. Boyd Muleya Head of Research Centre for Trade Policy and Development on Tuesday, August 31, 2021.

The influencers to the policy decision are:

  1. Inflation projections which suggest that inflation will remain within the target range, although close to the 8% upper bound of the range.
  2. Continued subdued economic activity, with heightened downward risks
  3. Sluggish private sector credit growth
  4. Slow progress towards fiscal consolidation as reflected in rising domestic arrears, public debt and external debt service payments
  5. Weak asset quality in the financial sector as reflected in high non-performing loans.

Underlying the decline in inflation is mostly the favourable outlook for the exchange rate and improved prospects for fiscal consolidation. In this regard, the MPC decided to maintain the Monetary Policy Rate at 8.50 percent. In arriving at this decision, the Committee remained mindful of the subdued economic activity and existing vulnerabilities in the financial system. Despite that inflation was beginning to trend downward, the bank needs to apply measures to further reduce inflation. Therefore, maintaining the policy rate helps to check inflation by mopping excess money out of the system. Monetary policy boils down to adjusting some combination of inflation and output stabilization.

Inflation occurs when prices continue to rise, meaning a country’s currency is worthless than it was before because it can’t buy as much (also known as decline in purchasing power). Inflation is a sign that the economy is growing. But high inflation is a problem because it discourages investment and lending and wipes out people’s savings as it erodes the value of money. For this reason, central banks work hard to keep inflation in check thus the decision to maintain the monetary policy rate.

Efforts to support financial sector stability and economic growth led to BOZ’s monetary policy committee keeping its rate steady. This will also help to induce the lowering of high interest rates and boost.

Decisions on the Policy Rate will continue to be guided by inflation forecasts, outcomes, and identified risks, including those associated with financial stability and the COVID-19 pandemic. Implementation of fiscal adjustment measures premised on fiscal discipline, the dismantling of domestic arrears, enhancement of revenue collections, securing an IMF programme, external debt restructuring and achieving a sustainable budget balance remain critical to restoring macroeconomic stability

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