Friday, March 28, 2014

Zambia raises rate 175 bps to 12% in 2nd hike in row

    Zambia's central bank raised its policy rate by a further 175 basis points to 12.0 percent on persistent inflationary pressures and said it expects "the passthrough effects from the depreciation of the exchange rate will impact on inflation."
    The Bank of Zambia, which has now raised its rate by 225 basis points this year after raising it by 50 basis points in 2013, added that the increase in the supply of select food items in the coming harvest should have a moderating impact on inflation.
    "The Committee expects that this adjustment (to policy rates) to buttress the measures implemented in the recent past and consequently contribute to moderating inflationary pressures," the bank said.
    Zambia's inflation rate rose to 7.7 percent in March, up from 7.6 percent in February and the fifth consecutive month of rising inflation.
    Last month the central bank said the rate rise and recent increases in reserve ratio to 14 percent from 8 percent should help put inflation on the path toward the bank's 2014 target of 6.5 percent.
    Zambia's kwacha currency has been depreciating since late October due to lower copper prices - which account for some 60 percent of the country's exports - in reaction to slower growth in China.

    The kwacha's exchange rate has been volatile this month, hitting a low of 6.43 to the U.S. dollar on March 20 compared with 5.83 end-February. Today it was trading at 6.21, down 11.3 percent this year.
   In January the central bank held an emergency meeting with lenders to examine the decline in the currency and on March 6 the bank issued a statement, saying it was continuing to pursue a flexible exchange rate policy, but this did not imply the absence of intervention by the bank in response to "disorder and panic among market participants."
    The central bank attributed the decline in the currency to a combination of domestic and international market developments with the growing integration of the country in the world economy having the effect that it is affected by foreign developments.
    "Specifically, the Federal Reserve's course of action has led to fears of slower growth of major emerging economies, particularly China," the bank said, and as a consequence the price of copper has remained subdued and there has been a slowdown in portfolio flows that help finance the country's current account deficit.
     "The Bank observes at this stage that panic has gripped market participants, thereby undermining the smooth operation of the foreign exchange market. Left unattended to, such panic sentiments might eventually undermine the Banks efforts of delivering low an stable rates of inflation," the bank said.
    On March 13 the bank said it had sold $178 million of foreign exchange to moderate the currency's volatile exchange rate.


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