MONETARY POLICY RATE INCREASES

The Zambian economy is heating up spurred by increasing inflation, runaway exchange rate and unresolved public debt, prompting the Central Bank to turn to fiscal safety catches to keep the country afloat amid uncertainties.

The runaway inflation-averaging 12 percent, twice the projected 6-8 percent band trending over the past months, low foreign exchange intake induced by low exports of commodities including copper threatens to induce financial instability and derail growth trajectory of between 2-4 percent in the aftermath of the COVID 19.

Monetary policy strategies include revising interest to 12.5 percent (150 basis points) from an initial 11.0 percent posted in the third quarter of last year, notes the need to take up various fiscal interventions to save the economy from further ‘damaging effects’.

The Central Bank says the action to review the policy rate was to stir back the skyrocketing inflationary rate to within admissible levels, having been projected to remain in the single digit band to help monitor inflation which has been spurred by among other factors, global factors.

The depreciation of the local currency, the Kwacha against major currencies as well as elevated food (maize and maize products) and energy (fuel) prices continued to push inflation up in the fourth quarter of 2023.

According to Central Bank’s report, inflation rose to an average of 12.9 percent from 11.0 percent in the third quarter of 2023. Inflationary pressures had continued in January, with annual inflation rising to 13.2 percent from 13.1 percent in December 2023.The monetary policy rate has increased by 150 basis points to 12.5 percent from 11 percent in the previous quarter.

Announcing the increase, Bank of Zambia Governor Denny Kalyalya explained that the decision by the Monetary Policy Committee was caused by a further increase in inflation rate in the fourth quarter of 2023.

Dr Kalyalya disclosed that inflationary pressures continued in January 2024 with annual inflation rising to 13.2 percent from 13.1 percent in December 2023.

Dr Kalyalya noted the consistent depreciation of the kwacha against major currencies, having a huge bearing on the country's inflation rate, including elevated food and energy prices.

The Governor explained that the increase in policy rate is aimed at steering inflation to the target band between six to eight percent and help anchor inflation expectations.

He however expressed optimism by the continued fiscal consolidation efforts, progress on the external debt restructuring and improved prospects of increased investment in key sectors of the economy.

"Growth prospects are more optimistic over the medium term relative to November projection. This mainly reflects projected recovery in mining, agriculture as well as wholesale and retail sectors," Dr Kalyalya stated.

He stated the Central Bank's commitment in collaboration with various stakeholders to go an extra mile to control the status for macro stability in the country.

He further noted that  the constraints on supply of foreign exchange that is currently happening when there is high demand in the country.

The Central Bank Governor said that this is putting pressure on the limited supply of foreign exchange.

He said the country needs more foreign exchange and a reduction on imports, especially those that can be made locally to stabilise the financial system, leading to economic growth.