Bank of Zam­bia Cuts rate 75bps as In­fla­tion Seen in Tar­get Range

Zambian Business Times - - FRONT PAGE -

BANK of Zam­bia cut its pol­icy rate for the fourth con­sec­u­tive time this year, though at a slower pace than in the past, as in­fla­tion con­tin­ues to de­cline and is ex­pected to re­main within the bank's tar­get range over the next two years. BOZ cut its pol­icy rate by 75 ba­sis points to 10.25 per­cent, half the size of the ear­lier cuts of 150 ba­sis points, and has now cut the rate by 525 points this year fol­low­ing cuts in Fe­bru­ary, May and Au­gust.

The BOZ also con­tin­ued its pol­icy of low­er­ing the statu­tory re­serve ra­tio along with cut­ting the pol­icy rate and cut the ra­tio by 150 ba­sis points to 8.0 per­cent. Pre­vi­ously the ra­tio was cut by 300 ba­sis points in Fe­bru­ary, May and Au­gust so it has been cut by 10.50 per­cent­age points this year.

BANK of Zam­bia cut its pol­icy rate for the fourth con­sec­u­tive time this year, though at a slower pace than in the past, as in­fla­tion con­tin­ues to de­cline and is ex­pected to re­main within the bank's tar­get range over the next two years.

BOZ cut its pol­icy rate by 75 ba­sis points to 10.25 per­cent, half the size of the ear­lier cuts of 150 ba­sis points, and has now cut the rate by 525 points this year fol­low­ing cuts in Fe­bru­ary, May and Au­gust.

The BOZ also con­tin­ued its pol­icy of low­er­ing the statu­tory re­serve ra­tio along with cut­ting the pol­icy rate and cut the ra­tio by 150 ba­sis points to 8.0 per­cent. Pre­vi­ously the ra­tio was cut by 300 ba­sis points in Fe­bru­ary, May and Au­gust so it has been cut by 10.50 per­cent­age points this year.

"Changes in the pol­icy rate will con­tinue to be guided by in­fla­tion out­comes and fore­casts as well as progress in fis­cal con­sol­i­da­tion," the cen­tral bank said, adding it stands ready to im­ple­ment ap­pro­pri­ate mea­sures to main­tain price and fi­nan­cial sys­tem sta­bil­ity and sup­port eco­nomic di­ver­si­fi­ca­tion and growth.

The out­look for Zam­bia's econ­omy has im­proved in re­cent months with good rain­fall and ris­ing cop­per prices. The BOZ's tight mon­e­tary pol­icy since late 2015 has man­aged to push down in­fla­tion from al­most 13 per­cent in Fe­bru­ary 2016 to 6.4 per­cent in Oc­to­ber as the ex­change rate of the kwacha has sta­bi­lized fol­low­ing a 42 per­cent plunge in 2015.

But the fis­cal deficit re­mains high and pub­lic debt has been ris­ing at what the In­ter­na­tional Mon­e­tary Fund has de­scribed as "an un­sus­tain­able pace," crowd­ing out lend­ing to the pri­vate sec­tor and in­creased the econ­omy's vul­ner­a­bil­ity.

"Con­tain­ing the bud­get deficit and the over­all debt, in­clud­ing do­mes­tic ar­rears, to sus­tain­able lev­els re­main crit­i­cal to con­sol­i­dat­ing macroe­co­nomic sta­bil­ity," the BOZ said, adding that the deficit on a cash ba­sis was in line with the 2017 bud­get tar­get of 7.0 per­cent for the year to Septem­ber.

The BOZ fore­cast that in­fla­tion is pro­jected to trend to­wards the lower bound of its 6-8 per­cent tar­get range over the next 8 quar­ters, with ex­cess sup­ply of maize, rel­a­tively sta­bil­ity of the ex­change rate and a re­cov­ery in com­mod­ity prices, es­pe­cially for cop­per, sup­port­ing low in­fla­tion.

Fol­low­ing the BOZ's rate cut in Au­gust the overnight in­ter­bank rate eased to 10.4 per­cent at the end of Septem­ber from 12.2 per­cent end-June, within the pol­icy rate cor­ri­dor of 10-12 per­cent.

Af­ter the kwacha tum­bled in 2015 on low cop­per prices, gov­ern­ment rev­enue and a poor har­vest from drought, the kwacha bounced back in 2016 and rose by 10 per­cent as the BOZ tight­ened its mon­e­tary pol­icy in Novem­ber 2015 and main­tained a tight stance un­til Fe­bru­ary this year.

To­day the kwacha was trad­ing at 10.12 to the U.S. dol­lar, down 1.6 per­cent this year, sup­ported by im­proved sup­ply of for­eign ex­change from the min­ing sec­tor and non-res­i­dent in­vest­ment in Gov­ern­ment se­cu­ri­ties, BOZ said.

The prospects for Zam­bia's econ­omy is im­prov­ing with busi­nesses ex­pect­ing higher in­vest­ment over the next 12 months as the min­ing and man­u­fac­tur­ing out­put, along with agri­cul­ture, ex­pands while a re­cov­ery in elec­tric­ity gen­er­a­tion should sup­port higher pro­duc­tion.

The BOZ pro­jected growth for 2017 and 2018 or 4.2 per­cent and 5.0 per­cent, re­spec­tively, fol­low­ing growth of 3.8 per­cent last year.

In Au­gust the cen­tral bank fore­cast 2017 growth of 4.3 per­cent and 2018 growth of 5.1 per­cent.

The IMF has fore­cast growth this year of 4.0 per­cent, ris­ing to 4.5 per­cent in 2018 and 2019. In­fla­tion is seen av­er­ag­ing 6.8 per­cent this year and 7.4 per­cent next year, down from 17.9 per­cent in 2016.

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