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Zambia Surprises with Second Interest Rate Hike This Year

Zambia Surprises with Second Interest Rate Hike This Year

Zambia’s central bank in a surprise move raised its benchmark interest rate for the second time this year to try contain inflation that’s still nearly triple the targeted rate.

The monetary policy committee lifted the gauge to 9% from 8.5%, Governor Denny Kalyalya told reporters Wednesday in Lusaka, the capital. It was Kalyalya’s first rate decision since being reappointed to the post in September.

The increase by “that magnitude, which we consider moderate, was really to begin to steer inflation” toward the target range, said Kalyalya, who acknowledged the increase may have come as a surprise. The central bank expects inflation to ease to below 10% next year and to within its 6%-8% target range by 2023, he said.

The inflation rate surged to a near two-decade high of 24.6% earlier this year on higher food prices, before easing to 21.1% last month.

The increase adds to a half-a-percentage point hike in February and further reverses some of the 350 basis points of cuts announced last year to shore up the economy of Africa’s second-largest copper producer from a coronavirus-induced slump.

The central bank also took into account negative real Treasury-bill rates in its decision to tighten monetary policy, Kalyalya said. Yields on benchmark one-year Treasury bills have more than halved to 12% this month from 25.8% in January.

The hike signifies that policy makers are moving to tame price growth even as the economy is expanding at a slower-than-expected pace. “Growth is not yet as robust as we want it to be,” said Kalyalya. 

The MPC’s decision may help reignite a rally in Zambian assets.

Currency Rally

The kwacha has been the second-best performing currency globally this year of those tracked by Bloomberg. The nation’s dollar bonds have returned 13%, making them the top performers in sub-Saharan Africa and fourth among emerging markets after Ecuador, Belize and Suriname in 2021. 

Investors have been betting that Hakainde Hichilema, who won a presidential election in August, and his administration will revive an economy that became Africa’s first pandemic-era sovereign defaulter last year after a decade of overspending fueled by external loans.

Last month, Finance Minister Situmbeko Musokotwane laid out aggressive plans to secure a much sought-after economic program with the International Monetary Fund. A deal could further strengthen the kwacha, which in turn could help curb inflation by reducing imported prices.

Zambia’s move follows more than two dozen emerging-market economies that raised rates this year, including Ghana and South Africa, as inflation risks mount and traders seek higher yields because of the prospect of more aggressive tightening by the U.S. Federal Reserve and other developed-market central banks.

©2021 Bloomberg L.P.