Liquidity spreads above BPR remain high in Zambia
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.