Zambia’s central bank lowered its policy rate for the second time this year as it expects inflation to steadily decline over the next two years due to better food supply and weak economic growth after remaining above its target range in the short term.
The Bank of Zambia (BOZ) cut its policy rate by a further 125 basis points to 8.0 percent and has now cut it 350 points this year following a cut in May this year when the central bank reversed course after raising its rate twice in 2019 to rein in rising inflation from a falling exchange rate.
”Decisions on the policy rate will continue to be guided by inflation forecasts, outcomes, and identified risks, including those associated with the COVID-19 pandemic,” BOZ said in a statement by the bank’s monetary policy committee.
Zambia’s inflation rate was largely steady at 15.8 percent in July from 15.9 percent in June, but below 16.6 percent in May. Inflation has been pushed up by a fall in the kwacha and higher food prices.
In the first quarter average food inflation rose by 1.4 percentage points to 16.9 percent while non-food inflation rose 3.9 points to 15.1 percent.
”Although projected to remain above the upper bound of the 6-8% medium-term target range, inflation is expected to steadily decline, reaching the upper bound by the end of the forecast horizon,” BOZ said, attributing this decline to more moderate food prices from a significant improvement in supply, especially of maize.
But inflation is still expected to be under upward pressure from the exchange rate and interest rate expectations due to the higher fiscal deficit and a weaker global economy.
Zambia’s economy slowed in the second half of last year and BOZ raised its forecast for a contraction of 4.2 percent this year, higher than a contraction of 2.6 percent previously expected, and compared with estimated growth of 1.4 percent in 2019.
”The substantial decline in consumer and investment spending due to disruptions in business operations are expected to continue to constrain economic growth,” the bank said, adding the most adversely affected sectors are tourism, wholesale and retail trade, and construction.
The kwacha has been weakening since September 2018 but it tumbled some 17 percent in March due to the outbreak of the pandemic, compounding concern over the country’s high debt service as the virus is expected to boost fiscal deficit and drain its international reserves.
Since April the kwacha has been more stable though it has slipped a bit since early July. Today the kwacha was trading at 18.82 to the U.S. dollar, down 25.3 percent this year.
”Consistent with its policy objective of allowing the exchange rate to adjust to market conditions, the Bank of Zambia has continued to provide measured support to the market,” BOZ said.
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