Zambia's central bank maintained its current tight monetary policy stance and a policy rate of 12.0 percent as inflation continued to rise in April but is forecast to decline in the second quarter to 7.3 percent from an average of 7.7 percent in the first quarter.
The Bank of Zambia, which has raised its rate by 225 basis points this year, most recently by 175 points last month, said its expectation for lower inflation was based on the premise of lower price pressures from an expected improvement in food supply in light of a good crop and the impact of the recent policy tightening.
But the upside risks to the forecasts include a depreciation of the kwacha exchange rate and a recent increase in fuel prices, the bank said.
The central bank's objective is to reduce inflation to 6.5 percent by year-end and it maintained interbank rates within a corridor of plus/minus 2 percentage points of the policy rate. Due to tight liquidity, the 5-day weighted overnight interbank interest rate rose to 15.7 percent at the end of March from 10.2 percent end-December.
Zambia's headline inflation rate rose to 7.8 percent in April, the sixth consecutive month of higher prices, due to a slight increase in food inflation while non-food inflation was stable. Year-to-date, inflation rose to 3.4 percent in April from 2.8 percent in the same 2013 period.
Zambia's kwacha currency weakened against most trading partners in the first quarter, including a 10.7 percent drop against the U.S. dollar, ending the period at 6.1031 to the dollar.
Since then, the kwacha has continued to drop, trading at 6.50 today, down 15.2 percent this year.
Zambia's current account swung into a deficit of US$ 118.8 million in the first quarter from a surplus of $30.2 million in the previous quarter, driven by higher interest and equity payments, lower services receipts and a decline in inflows from current transfers.
The capital and financial account was also in a deficit of $160.7 million compared with a surplus of $12.7 million in the fourth quarter, largely due to a higher accumulation of foreign direct investments abroad by the private sector, the bank said.
Zambia, a major copper exporter, has been diversifying its economy in recent years to reduce the dependence on mineral exports and Gross Domestic Product expanded by 6.5 percent in 2013.
This year the central bank projects growth of over 7.0 percent, driven by agriculture, manufacturing, construction and mining.
The central bank recently changed the frequency of its monetary policy committee meetings, cutting the number of meetings to six from 12 a year. Four of the MPC meetings will be quarterly - including the meeting on May 8 - and two of the meetings held to assess developments at the start and at the end of each year.