(Bloomberg) -- Zambia’s central bank held its key interest rate for the first time in almost two years to support its drought-battered economy, and as it felt the current monetary policy stance is appropriate considering that inflation is supply driven.
The monetary policy committee kept the rate at 13.5%, Governor Denny Kalyalya told reporters in the capital, Lusaka, on Wednesday. That matched the projection of two of three economists in a Bloomberg survey. The pause was the first after six straight hikes of a combined 450 basis points.
“The decision took into account the impact of the drought as well as that of the past successive increases in the policy rate, upward adjustments in the statutory reserve ratio, and recent reforms in the foreign exchange market,” Kalyalya said.
The economy is forecast to grow 2.3% this year, compared with a preliminary estimate of 5.8% in 2023, due to the impact of the drought, which has withered crops, stoked food prices and curtailed hydro-electricity production.
While annual inflation that’s at 15.4% is projected to average 15.3% in 2024, compared with a previous forecast of 13.7%, that is largely due to supply pressures on food and energy because of the drought, Kalyalya said. “Key risks to inflation remain broadly unchanged” from the MPC’s previous meeting, he said.
The MPC also raised its outer year forecasts. It expects inflation to moderate to 12.7% in 2025 and 10.8% in the first half of 2026. It also no longer predicts inflation to move into the 6% to 8% target band in the last quarter of 2025.
To help bring inflation further under control, the Bank of Zambia is consulting over plans to curb the use of foreign currency in domestic transactions, which it blames for complicating its task of containing price pressures. It hopes to conclude that process this month.
That plan has met opposition. Local companies often borrow in dollars because those loans offer much lower rates than kwacha debt. Dollar savings have also helped preserve wealth, after the local currency halved in value against the greenback over the past five years.
--With assistance from Simbarashe Gumbo.
©2024 Bloomberg L.P.
