Zambia maintains rate, tight liquidity to contain inflation

Lusaka, Zambia (Capital Markets in Africa) — The Bank of Zambia (BoZ) opted to leave the benchmark interest rate unchanged at 12.5% this week. The BoZ has aggressively tightened policy this year by hiking the cash reserve requirement ratio for banks from 14% to 18%. However, it has not lifted the benchmark interest rate since November 2014. During 2014 the interest rate was hiked aggressively by 275 basis points.

The BoZ noted that the kwacha has been under further pressure in 2015 and as a result inflation is likely to end this year slightly above its 7% target. The unchanged policy rate was therefore justified on the basis that policy is already tight and GDP growth is deteriorating (due largely to power rationing). The BoZ has clearly begun to prioritise economic growth and may be concerned that the effectiveness of further monetary tightening will be limited. This is because actual borrowing rates in the economy are already well above the policy rate as a result of the significant borrowing requirements of government. What is desperately required to alleviate the tight liquidity conditions is consolidation from government. However, this is unlikely in the short term as there is an election in about a year.