(Bloomberg) — Zambia lifted its benchmark interest rate for the first time since November 2021 to stem a slide in the nation’s currency that’s placing upward pressure on inflation as debt restructuring talks drag on.
(Bloomberg) — Zambia lifted its benchmark interest rate for the first time since November 2021 to stem a slide in the nation’s currency that’s placing upward pressure on inflation as debt restructuring talks drag on.
Policymakers increased the rate to 9.25% from 9%, Governor Denny Kalyalya told reporters Wednesday in Lusaka, the capital. Two of four analysts polled by Bloomberg predicted a hike.
The decision was taken in part because of mounting inflationary pressures stemming from the kwacha, which is weakening as a result of “negative sentiments arising from the protracted debt-restructuring negotiations,” Kalyalya said.
Delays in talks to rework $12.8 billion of external loans in Africa’s first pandemic-era sovereign defaulter and concerns that non-resident holders of local currency debt may be asked to take a haircut are putting pressure on bond yields and the kwacha, Kalyalya said. The government said it won’t include kwacha bonds in the revamp because of the risks to the local economy.
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The currency has depreciated almost 15% against the dollar since the MPC’s last meeting on Nov. 23. That’s its worst performance between quarterly MPC meetings since May 2020, when investors sold off the currency on bets that the southern African nation would renege on its debt obligations, which it did in November that year.
The kwacha could face further pressure from expectations that the US may need to raise interest rates even higher than previously forecast after January consumer prices rose briskly, which would boost the dollar.
Inflation Projections
Wednesday’s moderate rate increase will allow other measures taken by the central bank to slow a slump in the currency — such as increasing commercial lenders’ reserve ratios on Feb. 13 — to filter through, the governor said. Failing to halt the slide in the kwacha has the potential to undermine the emerging stable macroeconomic environment in Zambia, he said.
The monetary policy committee expects the annual inflation rate that’s been approaching the panel’s 6% to 8% target range for more than a year to start increasing, Kalyalya said. Price-growth is forecast to average 11.1% this year, compared with the 8.5% it projected in November, and remain above target over the central bank’s forecast horizon instead of returning within range by the first quarter of 2024, the governor said.
Plans to raise electricity tariffs by 37% and a possible reduction in corn output because of adverse weather conditions and infestations of fall armyworms may also push up prices, he said.
–With assistance from Simbarashe Gumbo, Matthew Hill and Zoe Schneeweiss.
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