Liq­uid­ity spreads above BPR re­main high in Zam­bia

Zambian Business Times - - FINANCIAL MARKETS -

The Bank of Zam­bia mon­e­tary pol­icy com­mit­tee an­nounced an un­changed in­ter­est rate stance on 16 May. The BOZ priced in in­fla­tion­ary pres­sures in the medium term and kept the in­ter­est rate un­changed at 9.75%. Also cited in the an­nounce­ment was com­mer­cial bank­ing stress posed by the stock of non-per­form­ing loans at 13% in ex­cess of the pru­den­tial 10% reg­u­la­tory limit at a time when the state tar­gets bullish growth. Up­side risks to in­fla­tion re­main and are ex­pected from ris­ing crude prices which weighed against the re­cent Kwacha weak­ness would trig­ger ERB to ad­just pump prices higher.

Credit spreads above the bench­mark rate have widened over 1,436 ba­sis points (A ba­sis point is de­fined as a per­cent­age point – 1bp = 0.01 such that 1,420 equates to 14.2%). In­fact credit spreads are far wider cur­rently than when the pol­icy rate was 15.5% ( its peak in the De­cem­ber 2015 to Fe­bru­ary 2017 pe­riod of tight mon­e­tary pol­icy). See graph be­low de­pict­ing the re­gres­sion anal­y­sis of the widen­ing credit spreads ris­ing at a ve­loc­ity of 46% per unit of time mea­sured in months.

Av­er­age lend­ing rates cur­rently os­cil­late around 24.1% (14% above the cur­rent 9.75% MPR) and have shown a very slow de­clin­ing pace com­pared to the quan­tum of bench­mark rate cuts. The re­gres­sion tests show that ALRs are falling at a very slow pace mea­sured by the gra­di­ent of the ALR curve slope (-0.0041) ver­sus that of the BPR slope (-0.0087).

The BOZ has since Fe­bru­ary 2017 em­barked on ex­pan­sion­ary mon­e­tary pol­icy with the aim of stim­u­lat­ing pri­vate sec­tor growth which had been pe­nal­ized due to high in­ter­est rates. The MPR has been trimmed 5.75% to 9.75% while more liq­uid­ity was in­jected into the sys­tem through a 13.5% loos­en­ing in the statu­tory re­serve ra­tio to 5%. How­ever even with these ag­gres­sive and sig­nif­i­cant pol­icy mea­sures, the req­ui­site in­ti­macy with fis­cal pol­icy is still weak. The Min­istry of Fi­nance is cur­rently on fis­cal con­sol­i­da­tion path that tar­gets to cor­rect cur­rent mis­align­ment’s in the medium term.

Source: ZBT Tech­ni­cal Anal­y­sis Desk. The graph is re­gressed over a 2.5- year pe­riod with credit spreads in ba­sis points be­ing the de­pen­dent vari­able and time be­ing the in­de­pen­dent vari­able. R squared – co­ef­fi­cient of de­ter­mi­na­tion is 0.65 show­ing a...

Source: Bank of Zam­bia web­site fort­night sta­tis­tics.

See graph be­low show­ing the re­gres­sion of and in­ter­est rate graphs.

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