Key Insights Into The The Bank Of Zambia’s Interest Rate Cut

On Wednesday, the Bank of Zambia cut its key interest rate for the first time in more than two years to counter the impact of the Coronavirus on the economy, even as inflation surged to a 43-month high in April. The Monetary Policy Committee reduced the rate to 9.25% from 11.5%, Governor Denny Kalyalya stated. It’s the biggest cut since the benchmark policy rate was introduced in March 2012.

“With COVID-19, the already challenged domestic macroeconomic environment has worsened. Fiscal pressures are expected to heighten in 2020 as revenue performance is adversely affected by COVID-19, while spending to combat the virus rises,” bank governor Denny Kalyalya told a media briefing.

The cut should help cushion the economy of Africa’s second-largest copper producer, which the central bank projects will contract by 2.6% this year. Gross domestic product expanded by 1.9% in 2019. The Bank of Zambia has provided a 10 billion Kwacha ($550 million) credit line to lenders that may face liquidity challenges for lending to small and medium-sized business affected by the pandemic. Zambia has to date recorded 920 cases and seven deaths.

The loosening could, however, add pressure on the Kwacha, which has weakened 22% against the dollar this year, making it one of Africa two worst-performing currencies. The unit has come under increased pressure as the economic fallout from the Coronavirus pandemic increases the chances of a debt default.

The drop in the Kwacha has added to inflation, which accelerated for a 13th straight month in April to 15.7%. While inflation has been above the central bank’s target band of 6% to 8% for a year, a good maize harvest from the 2019-20 rainy season that’ll soon enter the market could provide some cost relief. Kalyalya said price growth will trend to the upper end of the range by the end of the two-year forecast horizon.

International reserves declined to $1.39 billion by the end of March from $1.45 billion three months earlier. Before the Coronavirus hit Zambia, economic activity was already hampered by power shortages and the growing public debt stoking fears of a fiscal crisis.

Credit: Bloomberg & Reuters.

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News source: Zambia Reports

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