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BoZ hikes policy rate by 50bps amid rising inflationary pressures

February 18, 2021by Nicholas Kabaso
  • The Bank of Zambia (BoZ) yesterday hiked its monetary policy rate by 50bps to 8.00%, citing rising inflationary pressures, driving inflation fur-ther away from the upper band of the bank’s 6%-8% target range. The bank added that decision balances the need to contain rising inflation and anchor inflation expectations against the efforts made to support financial system stability and growth.
  • On the growth front, policymakers noted that domestic economic activity indicators point to a less severe contraction, but a weak recovery is projected in the medium-term. For 2021 and the medium-term economic growth is forecast to rebound, supported by positive growth in min-ing, electricity, gas, and water as well as information and communication sectors. However, downsides risks to this growth outlook are posed by the uncertainty surrounding the resurgence of coronavirus infection and the shrinking fiscal space.
  • Shifting focus to price dynamics, policymakers expect inflation over the next eight quarters to move further away from the upper bound of the target range as a result of the lagged pass-through from the depreciation of the Kwacha and sustained high fiscal deficits. Risks to the inflation outlook are tilted to the upside and is likely to surge further if crude oil price increases persist, fiscal deficits are wider than expected, and the Kwacha weakens further. Improved food supply and subdued aggregate demand to some extent could, however, mitigate inflation.
  • In conclusion, the BoZ stated that it “stands ready to adjust the policy rate upwards further should inflationary pressures persist”, a shift in stance from its rhetoric last year. This suggests the bank is likely to adopt a more prudent monetary policy approach going forward.
  • Speaking to reporters BoZ Governor Christopher Mvunga stated that Zambia has scaled back, postponed or cancelled projects to reduce its debt exposure and noted that talks with the IMF so far have been “cordial”. Mvunga was quoted as saying, “if I look at the disclosure of the debt portfolio, it is not moving upwards other than probably existing disbursements. So my reading of that is that the matter is being ad-dressed”. 
  • On a call yesterday, First Quantum Minerals COO Tristan Pascall said that the firm sees no risk of nationalization in Zambia following the sale last month of Mopani Copper Mines to ZCCM-IH in a $1.5bn deal. Pascall was quoted as saying, “we don’t see any contagion or any element or risk in that more broadly in Zambia”.
  • The march north continues for the copper markets globally. China returned from a week long Lunar New Year holiday this morning and the bulls got stuck in from the get go. Upbeat US data and a Federal Reserve which remains committed to maintaining its accommodative stance all added to the positive narrative. The benchmark 3m LME copper price rose by as much as 2.1% to $8565/tonne in early Asia trade while the Shanghai March copper contract hit new highs of CNY62870/tonne, levels not seen since Sept 2011.
  • Stateside, Fed minutes confirmed that Fed officials see the economy as being far from the point where it needs to be, to warrant the reduc-tion in stimulus efforts. Loose monetary policy is therefore unlikely to be rolled back any time soon. On the contrary, the Fed is actively looking at how it will communicate its intentions of looking through any short to medium-term spike in inflation which will likely arise out of the strong acceleration in money supply. Already there is much speculation of asset bubbles building which are a form of inflation, but the rapid rise in fuel prices in such a loose monetary environment could see it manifest at a consumer basket level as well. The flexibility in the Fed’s mandate will likely prove useful.
  • US retail sales data yesterday served to highlight the impact that fiscal stimulus can exert on an economy with the data showing the effects of the additional pandemic relief cheques that were distributed. Retail sales climbed by the most in seven months and helped reverse three con-secutive months of contraction. Sales surged 5.3% on the month and 7.4% y/y. With more stimulus to come in the form of Biden’s stimulus package that looks set to pass in the upcoming weeks.
  •  Shifting to the FX complex, the Kwacha halted its recent run of losses yesterday as USD-ZMW closed on the back foot. The decision by the BoZ to hike its policy rate in part supported the local unit. Meanwhile, the USD has enjoyed further support as it appears as though the economic picture has brightened following the better-than-expected retail sales data released yesterday. There was also a retreat in global equity mar-kets that will lift overall levels of risk aversion and further support the safe-haven USD. Technically, more gains are now possible, especially if a short squeeze unfolds with recent CFTC data highlighting how speculators retain a large net-short position on the USD.

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Nicholas Kabaso

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