Zambian Central Bank Holds Key Interest at Record-Low 8%

The Bank of Zambia kept its key interest rate at a record low to allow the impact of previous cuts to filter through the economy.

The monetary policy committee held the rate at 8%, Governor Christopher Mvunga told reporters Wednesday in Lusaka, the capital, after leading his first meeting of the panel.

The MPC under Mvunga, appointed in August, had to balance boosting the economy of Africa’s second-biggest copper producer with attracting inflows and supporting the kwacha as it weakened even further after Zambia failed to make an interest payment on Friday on one of its Eurobonds. That made the country the continent’s first pandemic-era sovereign default.

The kwacha has weakened 32% against the dollar this year, making it the worst performer of all currencies on the continent tracked by Bloomberg. The depreciation has added to inflation, which has been above the central bank’s target band of 6% to 8% for 18 straight months and quickened to 16% in October.

While the rate of price growth is expected to moderate over the next two years, it’s likely to remain above target, Mvunga said. Risks to the inflation outlook remain tilted to the upside, he said. The economy will probably contract by 4.2% this year and recover at a slower pace than previously thought due to limited fiscal space, he said.

“Successfully navigating the debt-restructuring process to restore debt sustainability and implementing fiscal and other structural reforms are critical to return to fiscal fitness,” Mvunga said.

The kwacha was 0.15% weaker at 20.94 on Wednesday. It could end the year at close to 26 against the greenback, Johannesburg-based Rand Merchant Bank said in a Nov. 16 client note.

“Central-bank intervention might taper the rate of weakening over the next few weeks but we still expect demand for dollars to increase alongside additional fiscal pressure,” RMB said.

Read more: RMB Sees Zambia’s Kwacha Weakening in Wake of Eurobond Default

Mvunga’s predecessor, Denny Kalyalya, cut the key rate by 125 basis points three days before he was removed from the post by President Edgar Lungu in August.

©2020 Bloomberg L.P.

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