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BoZ keeps its policy rate unchanged

May 20, 2021by Nicholas Kabaso
  • In line with expectations, the Bank of Zambia (BoZ) yesterday left its policy rate unchanged at 8.5%. Underlying the rationale behind the deci-sion was the need to allow for the rate hike in February to take full effect on the economy. While inflation is forecast to remain above the up-per bound of the 6-8% range for at least the next eight quarters, the bank indicated that price growth pressures are expected to ease faster than expected, mainly due to the improved supply of food, particularly corn and wheat. Concerns over existing financial vulnerabilities in the financial sector and fragile growth also supported the Boz’s decision.
  • The BoZ, however, reiterated that it remains committed to adjusting the policy rate upwards should the expected drop in inflation not materi-alize sooner than anticipated. Note while inflations slowed in April, it is almost triple the top of the BoZ target range. Upside risks to the infla-tion outlook include the possible increase in energy prices (fuel pump prices and electricity tariffs) and any resurgence of coronavirus infec-tions following the advent of the new variants.
  • On the fiscal front, Governor Mvunga said that he was “positive” talks with the IMF over a debt restructuring would be successful. Mvunga added “the announcement that the substantive understanding has been reached on a macroeconomic framework between the IMF and the government, the impending one-off allocation of SDRs to help countries fight the COVID-19 pandemic, and improved copper earnings are im-portant developments that can help create much needed fiscal space.”
  • Shifting to the political scene, main opposition leader Hakainde Hichilema yesterday named Mutale Nalumango as his running mate for the upcoming elections, marking the first time his party has selected a woman for the role. Hichilema’s United Party for National Development in
  • February appointed Nalumango as its vice president, a move seen as an attempt to gain votes from the northern part of the country, where she’s from. A teacher by profession, Nalumango served as deputy speaker of the National Assembly between 2006 and 2011.
  • While inflation concerns underpinned the likes of gold it did the industrial metals complex no favours yesterday. Flare ups of COVID-19 cases in various parts of the world have also stoked fears that growth may be patchy and some of the efforts made to rebuild could stall.
  • Copper fell by some 4% yesterday as did Zinc and Nickel, Lead shed around 2.5% as did aluminium in the broad market correction which to be fair is often needed to clear out stale longs and tactical price takers. This morning the tone is not much better, fears of Chinese price curbs are driving metals lower in Asia as the wash out continues.
  • Yesterday’s FOMC minutes made for interesting reading. Although some members broached the topic of tapering, the Fed remains committed to supporting the economy for as long as its required. Inflation’s rise is seen as temporary, some of the labour market data has not been as strong as anticipated, and there is still some way to go before the committee’s objectives have been achieved. That being said, the minutes al-so stated that “A number of participants suggested that if the economy continued to make rapid progress toward the Committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases.”
  • As far as the labour market is concerned, it is always important to keep an eye on developments as an improvement in the labour market will likely be one of the most important drivers of the Fed to reconsider its policy. Today’s weekly jobless claims will be a case in point. Further improvement in this high-frequency data will almost certainly translate into speculation around the timing of Fed tapering. This will hold some implications for US Treasuries, Wall St and the USD.
  •  With the Fed indicating that the topic of tapering had been broached, US Treasury yields ticked up, equity markets sold off and a general rotation back towards the USD took hold. Although some of yesterday’s gains appear to be eroding first thing this morning, the jump in the USD did cause some consternation across many FX pairs. Investors will likely settle back down today and a better sense of USD bias will become evident. Fundamentally, very little has changed in that US monetary policy remains loose, and the twin deficits are as wide as ever. It remains too soon to turn overly bullish the USD.
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Nicholas Kabaso

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