Zambia Central Bank Raises Key Lending Rate to 14% from 13.5%
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Loading... - WINDA KINOTI
- 18 Nov 2024
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Zambia’s central bank has raised its key interest rate to 14%, marking the highest level since 2017, in a bid to combat rising inflation and stabilize the country's currency. The decision was announced by Governor Denny Kalyalya during a press conference in the capital, Lusaka, on Wednesday.
The increase from 13.5% to 14% is part of the central bank's strategy to steer inflation back towards its target band of 6%-8% and to anchor inflation expectations. Kalyalya emphasized the importance of this decision, stating, “We took account of what was happening in the foreign exchange market.” Annual inflation in Zambia has remained above the central bank's target since May 2019, currently hovering near a three-year high of 15.7%.
The Zambian kwacha has depreciated by nearly 3% since October 24, exacerbating inflationary pressures. The governor attributed the currency's weakness to increased demand for foreign exchange, which has surged from $7.4 million at the end of September to $52.7 million as of November 4. The depreciation is further fueled by a severe drought that has led to a low supply of essential commodities such as corn, fish, and vegetables, alongside heightened demand for fuel due to electricity shortages. Zambia relies heavily on hydroelectric power, which has been significantly impacted by low water levels.
Looking ahead, the central bank forecasts that annual inflation will average around 15% in 2024. The monetary policy committee (MPC) has also adjusted its outer year forecasts, projecting inflation at 13.9% in 2025, up from the 12.7% reported in August. Kalyalya reassured that the bank is prepared to take necessary actions if inflation continues to exceed the target band, stating, “The bank stands ready to take appropriate action should inflation persist above the 6%-8% target band.”
The rate hike comes shortly after the International Monetary Fund (IMF) urged the central bank to maintain an agile monetary policy to combat inflation while preserving exchange rate flexibility. The IMF highlighted the need for the central bank to drive inflation toward the target amid a negative real policy rate, looser liquidity conditions, and strong growth in monetary aggregates.
The ongoing drought has also adversely affected economic growth, with the IMF recently revising its 2024 growth projections for Zambia down to 1.2% from 2.3%. This would represent the slowest economic expansion in 25 years, excluding the contraction experienced in 2020 during the peak of the pandemic.
In summary, the Zambian central bank's decision to raise the key lending rate reflects a proactive approach to managing inflation and stabilizing the currency amid challenging economic conditions. The focus remains on ensuring financial stability while addressing the pressing issues of inflation and currency depreciation.
