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The Monetary Policy Committee decided to raise the interest rate by 25 basis points to 9.25 percent. The decision was underpinned by the projection that inflation will increase and remain above the target range over the forecast horizon. Bank of Zambia Governor Dr. Denny H. Kalyalya stated that the decision to raise the interest rate was not an easy one, but it was necessary to address the potential upside risks to inflation.
The Monetary Policy Committee decided to raise the interest rate by 25 basis points to 9.25 percent. The decision was underpinned by the projection that inflation will increase and remain above the target range over the forecast horizon. Bank of Zambia Governor Dr. Denny H. Kalyalya stated that the decision to raise the interest rate was not an easy one, but it was necessary to address the potential upside risks to inflation.
Average overall inflation fell to 9.8 percent from 9.9 percent in the third quarter. The decline arose from non-food inflation, which reduced to 6.8 percent from 7.4 percent, largely due to the lagged pass-through from the appreciation of the Kwacha against the US dollar. Nonetheless, food inflation increased to 12.1 percent from 11.8 percent, mainly driven by higher prices of bread and cereals. The forecast horizon, inflation is projected to increase and remain above the 6 – 8 percent target range. This is in sharp contrast to the earlier projection in November 2022 that showed that inflation would return to the target range in the first quarter of 2024. Inflation is now projected to average 11.1 percent in 2023 compared to the November 2022 forecast of 8.5 percent. In 2024, inflation is forecast to average 10.1 percent.
After a cumulative appreciation of 10.0 percent in the previous two quarters, the Kwacha depreciated by 4.3 percent against the US dollar to an average of K16.71 in the fourth quarter of 2022. The depreciating trend in the Kwacha has persisted in 2023, with the Kwacha trading at K19.33 per US dollar as of February 14.
Governor also announced the decision to raise the statutory reserve ratio on commercial banks’ deposit liabilities by 2.5 percentage points to 11.5 percent as an additional measure to minimize exchange rate volatility.
It is been observed that the current account, which had recently been robust, has now weakened with adverse implications on the foreign exchange market. Exports fell by 6.2 percent to US$2.7 billion owing to lower copper and gold earnings as realized prices fell. Imports grew by 4.8 percent to US$2.2 billion, mainly driven by an increase in intermediate and capital goods, mostly fertilizers, machinery, and equipment. The current account surplus declined sharply to US$18.3 million in the fourth quarter of 2022 from US$245.0 million in the previous quarter. This was largely driven by a significant reduction in net merchandise exports and an expansion in the services account deficit.
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The Bank of Zambia expressed optimism that the current measures would help stabilize the foreign exchange market and reduce inflationary pressures. The Governor stated that the Committee remains confident that the current monetary policy stance is appropriate to support the Bank’s objective of achieving and maintaining price and financial system stability. The Bank will continue to monitor economic developments and stands ready to implement further measures as necessary to address any emerging risks to price and financial system stability.
