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The Central Bank of Zambia kept its benchmark interest rate unchanged at 13.5% during its regular meeting on August 14th, highlighting the economic impact of a severe drought.
This decision follows six consecutive rate hikes. The bank of Zambia has hiked rate by 250 basis points already in 2024. Inflation in Zambia has been climbing since mid-2023, reaching 15.4% in July, driven by a depreciating currency and ongoing drought conditions.
“The Monetary Policy Rate has been maintained at 13.5%. The decision to maintain was arrived at by the Monetary Policy Committee (MPC) at its Meeting held on August 12 – 13, 2024”. Governor, Dr. Denny Kalyalya, is currently delivering the Statement.
While actual and projected inflation remain elevated relative to the 6-8% target band, the Committee judged that the current monetary policy stance is appropriate.
The authority said the decision takes 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 the recent reforms in the foreign exchange market
Kalyalya stated that inflationary pressures have persisted, with inflation rising to an average of 14.6% in Q2 of 2024 from 13.5% in Q1
In July, inflation increased to 15.4% from 15.2% in June. Factors that continued to drive inflation in Q2: Persistent depreciation of the Kwacha against major currencies, as well as rising prices of food (maize grain, maize products, and vegetables) and energy, particularly fuel.
At the MPC Meeting of May 2024, inflation was projected to move into the 6-8% target band in Q4 of 2025. The current forecast, however, points to inflation staying above the target band throughout the forecast horizon.
Factors driving inflation remain key upside risks to the outlook, exacerbated by extended hours of electricity load management, as well as continued geopolitical conflicts and tight global financial conditions.
For 2024 as a whole, inflation is projected to average 15.3%, higher than the 13.7% reported at the MPC Meeting of May, 2024 Inflation is, however, forecast to moderate to 12.7% in 2025, albeit higher than the 9.8% reported in the May 2024 Monetary Policy Report.
In Q2 of 2024, the depreciation of the Kwacha against the US dollar moderated further to 3.8% from 10.6% in Q1. The slowdown was attributed to improved supply of forex, particularly from the mining sector and moderation in demand
Mining tax receipts remitted directly to the Bank increased to US$252.5 million in Q2 from US$190.8 million in Q1.
Gross international reserves increased to US$3.9 billion (equivalent to 4.3 months of import cover) at end-June from US$3.6 billion (equivalent to 3.9 months of import cover) at end-March. This was mainly due to US$569.6 million disbursed by the International Monetary Fund (IMF) under the extended credit facility (ECF) arrangement.
Economic activity remained weak in Q2 as business conditions deteriorated in the wake of the adverse impact of the drought. Growth prospects for 2024 remain pessimistic, with growth projected at 2.3% on account of the adverse impact of the drought on agriculture and energy sectors. Growth is expected to rebound in 2025.
Decisions on the Policy Rate will continue to be guided by inflation outcomes, forecasts, and identified risks, including those associated with financial stability, Kalyalya, said. The Bank stands ready to take appropriate action should inflation persist above the 6-8% target band.
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