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8.5 per cent policy rate maintained


THE Bank of Zambia (BoZ) should not make any revisions to the monetary policy position and statutory reserves as doing so may spike inflation at a faster rate or add liquidity pressure in the financial market.

The Monetary Policy Committee (MPC) had in its first meeting on February 17, this year hiked rates 50 basis points to 8.5 percent which marked the genesis of the rate hiking cycle pressured by an eminent exchange rate rout.

Some stakeholders such as Caesar Cheelo, a local economist at Equilibria Consulting Limited had predicted that the BoZ would not make any adjustments to the policy rate.

Mr Cheelo had urged the BoZ not to revise both the policy rate and the statutory reserves.

He explained in an interview that reducing upwards would stimulate money demand for transactions at a faster rate, thereby increasing inflation rate while increasing it may add more pressure on the banking industry.

April inflation slowed 0.1 percent to 22.7 percent, signalling peaking consumer price index.

“Reducing the policy rate and lowering the reserve requirement, may stimulate money demand for transactions at a faster rate than the rate of agriculture, food production and supply responses, so that the increased money demand causes upward inflationary pressures.

“From a monetary policy point of view, food shortages or low food production mean that liquidity in the agriculture sector is in low supply. Thus, tightening monetary conditions (by increasing the Policy rate and reserve requirements) may constrain the agriculture sector further and cause the shortages and inflation to get worse,” Mr Cheelo said.

He indicated that inflation was high, but stabilising at those high levels 22.7 percent in April compared to 22.8 percent in March meant that there was a food supply shortage, most likely due to low production during Covid-19.

Mr Cheelo said from a monetary policy point of view, food shortages or low food production meant that credit in the agriculture sector was in low supply.

And the Kwacha Arbitrageur Magazine indicated that: “we remain of the view that there’s a 90 percent likelihood that the policy rate will remain at 8.5 percent while a hike of 50 basis points could still be effected with 10 percent probability.”

The Centre for Trade Policy and Development (CTPD) expected the committee to maintain the Monetary Policy Rate (MPR) at 8.50 percent in order to give more time for the upward adjustment that was made in the first quarter of 2021 to take full effect. According CTPD Researcher Public Finance Manager Wakumelo Mataa, although there has been a slowdown in inflation since the last upwards adjustment,the prevailing rate of inflation at over 22 percent remains well above the 6 – 8 percent target range. “Therefore, CTPD does not expect a downward adjustment of the MPR,” a statement reads in part.

“CTPD notes that overall inflation rose to a quarterly average of 22.17 percent in the first quarter of 2021 from the previous outturn of 17.53 percent, driven mainly by an increase in food inflation as non-food inflation slowed down.

Food Inflation rose substantially, to a quarterly average of 26.90 percent from the previous 17.20 percent while non-food inflation declined to a quarterly average of 16.63 percent from the previous 18.03 percent.

Supply-side constraints contributed to the rise in overall inflation over the review period.

Banking on copper induced confidence and an inflation ebb, the Bank of Zambia (BoZ) has held its benchmark interest rate at 8.5 percent, last week.

This has been driven mainly by rising copper prices, improved investor flows especially in Government securities market which would shape inflation trajectory over the next eight quarters.

The Central Bank has however indicated that it will tighten the policy rate in the next sitting should inflation rate not reduce sooner than expected.

Zambia’s annual inflation rate currently stands at 22.7 percent while a tonne of copper is trading at more than $10,462.

The Central Bank will monitor inflation with latitude for adjustment in its current stance should consumer price index deviate from expectations.

Inflationary pressures are expected to ease in view of improved food supply particularly maize and wheat following a good crop harvest, BoZ Governor, Christopher Mvunga said during a media briefing.

Mr Mvunga explained that the decision to maintain the policy rate was in recognition of existing vulnerabilities in the financial sector and fragile growth.

The BoZ Governor stressed that the significant improvement in copper prices and renewed interest in domestic Government securities by non-resident investors were supportive of the foreign exchange market and in turn lower inflation going forward.

“While inflation is projected to remain above the upper bound of the six to eight percent target range over the next eight quarters, inflationary pressures are now expected to subside more quickly than envisaged in the February Monetary Policy Committee meeting.

“This is on account of the excess supply of maize in view of a good crop harvest, higher copper prices and improved external financing. Inflation is projected to average 21.9 percent and 16.7 percent in 2021 and 2022, respectively,” M Mvunga said.

He however said elevated fiscal deficits, higher crude oil prices and rising inflation in some major trading partners countries were the key sources of inflationary pressure over the forecast period.

Mr Mvunga indicated that these were expected to be mitigated somewhat by significantly higher copper prices.

“Over this period, the key upside risks of inflation is the possible increase in energy prices and any resurgence of the Covuid-19indfections following the advent of the new variants,” Mr Mvunga said.



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