Bank of Zambia Rate Cut Signals Relief for Borrowers as Inflation Eases

By Alain Kabinda

LUSAKA — For households struggling with the cost of borrowing and businesses facing high financing costs, the Bank of Zambia's decision to cut its Monetary Policy Rate by 250 basis points could mark an important shift in the country's economic landscape.

The Bank of Zambia Monetary Policy Committee (MPC) has reduced the policy rate from 13.25 percent to 10.75 percent, citing declining inflation, improved macroeconomic conditions and stronger economic activity.

Announcing the decision during the MPR Announcement in Lusaka, Bank of Zambia Governor Dr. Denny Kalyalya said the reduction was aimed at aligning monetary policy with the changing economic environment while creating room for lower lending rates.

                                                        Dr. Denny Kalyalya

Inflation declined to 6.1 percent in September 2026, from 6.5 percent at the end of June and 7.1 percent previously. On an average basis, inflation fell from 8.2 percent in the first quarter to 6.6 percent in the second quarter and is currently averaging about 6.3 percent in the third quarter.

The central bank now projects average inflation at 6.7 percent for 2026, down slightly from its previous projection of 6.8 percent.

It expects inflation to average 6 percent in 2027 and 6.3 percent during the first half of 2028.

The improvement has been supported by several factors, including a good maize harvest, continued appreciation of the Kwacha against major currencies, lower prices of some non-food items and improved fiscal consolidation.

For ordinary consumers and businesses, however, the significance of the policy rate lies in what happens next.

A reduction in the policy rate does not automatically mean that every borrower will immediately see a similar reduction in the interest charged on loans.

And Dr. Kalyalya noted that lending rates had remained relatively sticky even as yields on government securities declined.

The policy adjustment is therefore intended to provide room for financial institutions to review their lending rates and potentially make credit more affordable.

For small businesses seeking working capital, farmers requiring financing for production, households servicing loans and companies looking to expand, the transmission of the rate cut could influence investment and consumption decisions.

Lower borrowing costs could also reduce the cost of doing business, provided commercial lending rates respond to the change in monetary policy.

The Governor said the move should give economic actors greater breathing space to either establish new enterprises or expand existing productive capacity.

The rate decision comes against a backdrop of continued improvement in Zambia's foreign exchange market. And for the Kwacha continued to appreciate during the third quarter, although at a slower pace than in the previous quarter.

The currency appreciated by 8.3 percent during the third quarter, compared with 14.8 percent in the preceding quarter, and had recorded a further 0.8 percent appreciation by September 28.

The mining sector remained a major source of foreign exchange.

Net foreign exchange sales by mining companies increased to about US$770 million in the second quarter, from US$626 million previously.

Mining tax payments also increased to US$398.7 million, compared with US$289.7 million previously, contributing to total flows of about US$1.2 billion.

However, increased economic activity has also generated stronger demand for foreign exchange, particularly for imports.

This has resulted in periods of net demand despite relatively strong foreign exchange supply.

The Bank of Zambia says it intervened with about US$2 billion to smooth excessive volatility, while remaining a net purchaser of foreign exchange.

For Zambia's gross international reserves stood at US$5.8 billion, equivalent to about 4.4 months of import cover, at the end of June.

The decline from US$6.2 billion was largely attributed to two major debt-related payments — US$514.8 million for a Eurobond buyback and US$453.4 million for a maturing bond.

The reserves subsequently recovered to approximately US$6 billion, representing 4.5 months of import cover, by July.

The rebuilding of reserves was supported by mining taxes, project inflows, non-tax revenue, interest earned on reserves and gold purchases.

Gold purchases alone amounted to about US$508.5 million, with the price of gold reaching approximately US$4,100 per ounce as of September 29.

The current account surplus widened to about US$300 million, equivalent to 3.2 percent of GDP.

The improvement was driven by strong copper exports, lower reinvested earnings by foreign-owned companies and growth in non-traditional exports.

Non-traditional exports increased by 31.7 percent to US$1.5 billion, largely supported by nickel, while traditional exports grew by 3.7 percent to US$3.1 billion.

And Zambia's economy grew by 7.22 percent in the second quarter of 2026, although this was slightly lower than growth recorded in the first quarter.

The Purchasing Managers' Index remained above the 50-point threshold, indicating continued expansion in business activity.

Businesses cited declining inflation, exchange-rate stability and improved electricity supply among the factors supporting economic activity.

The Bank of Zambia projects GDP growth of 5.3 percent in 2026, rising to 6 percent in 2027 and 7.1 percent in 2028.

Domestic credit expanded by 14.4 percent in nominal terms to June, while private-sector credit growth accelerated to 12.9 percent from 8.1 percent. The Government securities outstanding stood at approximately K270.7 billion at the end of June.

Demand for Treasury bills remained stronger than demand for government bonds, with Treasury bills recording a subscription rate of 107.8 percent compared with 61.7 percent for bonds.

Dr. Kalyalya warned of several upside risks that could disrupt the inflation outlook.

Among them is the possibility of a Super El Niño, which could affect agricultural production and food prices.

The Governor also pointed to the potential impact of a prolonged conflict in the Middle East on global oil prices, as well as geopolitical tensions, tariffs and tighter global financial conditions.

Changes in monetary policy by major economies could trigger capital outflows from emerging markets, placing pressure on currencies such as the Kwacha.

“Even when the water is calm there could be some waves if you don't take precautions,” Dr. Kalyalya warned.

It is a test of whether improving inflation, currency stability, stronger reserves and economic growth can translate into tangible relief for households and businesses.

The broader objective is to ensure that the improving macroeconomic environment begins to support productive investment, business expansion and reduced financial pressure across the economy.

The effectiveness of the rate cut will ultimately depend on how quickly and fully it passes through from the central bank's policy rate to commercial lending rates — and how businesses and households respond when the cost of credit begins to ease.