Tuesday, May 17, 2016

Zambia holds rate but sees improved inflation outlook

    Zambia's central bank left its policy rate unchanged at 15.50 percent but said the outlook for inflation had improved significantly since February and inflation is now expected to decline sharply in the fourth quarter of this year and move toward single digits.
    The Bank of Zambia raised its rate by a total of 575 basis points in 2014 and 2015 to curb inflation and has maintained a tight monetary policy stance so far this year, with the policy rate steady and access to its overnight lending facility restricted to once a week at a rate of 25.5 percent to limit liquidity and contain depreciation of the kwacha's exchange rate.
     "The Committee looks to the consolidation of positive developments in inflation and fiscal adjustment as key triggers to considering adjustments to the Policy Rate going forward," the central bank said.
    Zambia's inflation rate eased to 21.8 percent in April from 22.2 percent in March and a 2016-high of 22.9 percent in February, with the central bank saying inflationary pressures "appear" to have peaked due to the relative stability in the exchange rate.
    Zambia's kwacha has been extremely volatile in recent years - in 2015 it depreciated by 42 percent against the U.S. dollar despite central bank intervention to support it - and after firming sharply in March and April, it has been depreciating slowly in the last month.
    The kwacha was quoted at 10.1 to the dollar today, up almost 9 percent since the start of this year, with the appreciation helping offset some of the effects of power rationing on production costs, a decline in the supply of some food items and an increase in taxes and customs duties on some non-food items.
    "As the Bank transitions to a new monetary policy framework wit a greater reliance on price signals, it continued to rely on some quantitative measures to address the extreme volatility in the foreign exchange market," the central bank said.
    In February the central bank had expected inflation to continue to rise in the first quarter of 2016 and average 21.6 percent before returning to levels seen between January and September 2015.
    Today the central bank forecast that inflation will average 20.3 percent in the second quarter of this year due to improved supply of food and the stable exchange rate. In the third quarter inflation is seen averaging 17.7 percent and then 8.7 percent in the fourth quarter based on a stable exchange rate and expected fiscal consolidation.
    In addition to the stability of the kwacha, the central bank said government finances had showed some improvement and the current account deficit had narrowed.
    Credit also contracted by a further 3.8 percent to 45.8 billion kwacha in the first quarter of this year due to tight liquidity, high funding costs, increased collateral requirements and reduced risk appetite.
    The current account deficit narrowed to US$168.6 million from $482.5 million as imports fell more than exports due to seasonal fluctuations in fertilizer needs and the lagged effect of the depreciation of the kwacha.
    Zambia is Africa's second largest copper producer and the decline in exports was due to lower copper volumes.
   Last week Zambia's president, Edgar Lungu who is facing an election in August, said he expected inflation to slow to single digits within months and economic growth should accelerate slightly to 3.7 percent this year from 3.5 percent in 2015.




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