Zambia Holds Key Rate as Currency Rally Helps Rein in Inflation
Zambia’s central bank kept its benchmark interest rate unchanged, with inflation seen decelerating faster than earlier expected.
The monetary policy committee held the rate at 8.5%, Governor Christopher Mvunga told reporters Wednesday in Lusaka, the capital. This was the MPC’s first rate decision under a new government following elections last month.
The decision to hold was supported by a slowdown in inflation from a near 19-year high in August that’s expected to be sustained on the back of a stronger kwacha. Zambia imports everything from fuel to food, so currency volatility has a major bearing on price growth.
“We see inflation on a downward trend” although remaining above the central bank’s target of 6%-8% for the next two years, Mvunga said. Price growth is expected to average 22.6% this year, 15.5% next year and 11.9% in the first half of 2023.
A sharp drop in yields at a government bond auction that saw record demand also seems to be signaling that investors expect inflation will cool in the coming months.
A kwacha bond sale on Aug. 27 saw the central bank raising 2.5 billion kwacha ($156 million), having received bids for a record 12.5 billion kwacha. Yields fell across the curve, with those on the five-year notes dropping almost 8 percentage points to 25%.
Since Hakainde Hichilema was declared the winner of the presidential election on Aug. 16, the kwacha has surged by almost 20% against the dollar, more than any other currency tracked by Bloomberg. The rally has largely been driven by expectations that Hichilema will rein in public debt and the budget deficit, while restoring the nation’s credibility after it became Africa’s first pandemic-era sovereign defaulter last year.
The nation’s newly appointed Finance Minister Situmbeko Musokotwane has laid out aggressive plans to secure a much sought-after economic program with the International Monetary Fund by November. A deal could further strengthen the kwacha which in turn could help curb inflation that has been above the 8% upper limit of the central bank’s target band for more than two years.
Higher foreign-exchange reserves due to soaring copper prices, its main export, and a $1.3 billion allocation from the IMF’s special drawing rights have also boosted the currency. Foreign-currency reserves stood at $2.9 billion as at end August, compared with $1.4 billion at June 30.
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