Tuesday, August 5, 2014

Zambia maintains rate, sees results of past tightening

    Zambia's central bank maintained its policy rate at 12.0 percent, saying it is determined to maintain price and financial stability as this is the best way to support economic growth and "will take appropriate measures when this stability is challenged or under threat."
    The Bank of Zambia, which has raised its rate by 225 basis points this year, said its tightening during the second quarter was beginning to bear the intended results but inflationary pressures remained so it had decided to maintain its key rate.
    For much of the second quarter, money market liquidity was tight with the weighted interbank rate rising as high as 25 percent at the end of May from around 16 percent at the end of March.
    But in July, when pressures in the foreign exchange market receded, the central bank was able to inject liquidity into the banking system through open market operations, helping the interbank rate decline to 14.5 percent and thus ease the wholesale funding cost to banks.
    With the interbank rate having return to levels that are consistent with the policy rate, the maximum annual effective lending rate ceiling has been adjusted down to 24 percent from 28 percent.

    The central bank, which raised the statutory reserve ratios to 14 percent from 8 percent in April and then tightened the maintenance period to a daily average from a weekly average, said it would continue to monitor liquidity conditions and "stands ready to provide further support to the market should this be required, including through the reduction in the statutory reserve ratios."
    Inflationary pressures also appear to have stabilized between June and July although headline inflation rose to 8.0 percent in July from 7.9 percent, the bank said. Annual food inflation fell to 6.9 percent in July from 78 percent in June while non-food inflation rose to 9.2 percent from 8.0 percent.
    Upside risks to inflation in the third quarter include second round effects of the upward revision in electricity tariffs, the lagged effects of the depreciation of the exchange rate in the second quarter and the upward adjustment in the maize floor price.
    Downside risks include the seasonal decline in food prices as well as the stabilization of the exchange rate, which is expected to exert downward pressure.
    The exchange rate of Zambia's kwacha depreciated by 2 percent against the U.S. dollar during the second quarter to 6.26 to the dollar end-June from 6.10 end-March. However, the kwacha also fell above 7 to the dollar at the end of May, a depreciation of some 25 percent on a year-to-date basis.
    Since mid-July the kwacha has been relatively stable around 6.15 to the dollar.



Post a Comment