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BoZ set to deliver its latest verdict on its policy rate

May 19, 2021by Nicholas Kabaso
  • The Zambian Health ministry yesterday reported that the country had recorded its first case of the highly infectious Indian coronavirus variant. Furthermore, the ministry indicated that the country is likely to face challenges in the procurement of the AstraZeneca vaccine through the COVAX facility due to increased demand in India.
  • The Bank of Zambia is set to deliver its latest verdict on its policy rate today. While inflation risks remain tilted to the upside, driven by soaring international commodity and food prices, a depreciating Kwacha, and deteriorating fiscal position, expectations are that the bank will likely keep its policy rate unchanged. Policymakers are expected to overlook inflation concerns and instead look to direct their efforts towards eco-nomic growth. A marginal drop in inflation in Zambia that’s almost triple the top of the BoZ target range suggests that policymakers face less pressure to hike the policy rate as done so at the February meeting. That said, with inflation risks prevalent, we expect the BoZ to remain cau-tious and reiterate last meeting’s statement that it “stands ready to adjust the policy rate upwards further should inflationary pressures per-sist.”
  • Copper closed at $10405/tonne last night adding some 0.31% on the day. The red metal has however pulled back during the Asian session this morning as investors price for additional supplies hitting the market as early as next year. 
  • Reuters reported – Commodity trader and miner Glencore, one of the world’s largest copper producers and leading cobalt producers, plans to restart operations at Mutanda in the Democratic Republic of Congo in 2022, a source with direct knowledge of the matter told Reuters.
  • The International Wrought Copper Council stated that they see global demand for copper rising by 3.3% in 2022 which should lead to a mostly balanced market following the shortfall of 500 000 tonnes in 2021. 
  • One point worth noting is that cash copper is trading at a discount of some $28.75/tonne to the 3m benchmark. This is the largest discount since June 2020 and shows that there is ample availability of copper in the near term.
  • On the international front, the US, Canada and Mexico confirmed that they held robust trade talks on the new North American trade deal. They downplayed their differences and pledged to enforce higher standards. This remains a remnant of the Trump administration although in this particular deal there was mention of fighting climate change which is a substantive difference. The trade deal would govern approximately $1.5trln in annual trade which makes this a significant deal.
  • Meanwhile, Secretary of State Yellen is doing her best to sell President Biden’s plan to use tax hikes to fund an infrastructural spending pro-ject. It seems like she will have a tough time, with corporate America likely to vehemently oppose any lifting of taxes which they believe would detract from overall growth, investment by the private sector and the labour market. That is more in line with the Republican perspective that also appears to be more in keeping with the Chamber’s line of thinking.
  • While the April US CPI print sounded alarms about out-of-control inflation, the Federal Reserve continues to communicate that the recent episode of inflation is transitory. The FOMC meeting minutes are expected to underpin this notion. No material differences from the FOMC policy statement are expected. Although inflation is expected to rise to around 2.4% this year amid soaring commodity and food prices and as the economy reopens, the central bank expects inflation to return to its 2.0% goal next year. Even though inflation risks are tilted to the up-side, there is a strong case that can be made for a moderate inflation outlook. Inflation expectations over the medium to long term remain relatively anchored. Moreover, the level of slack in the labour market remains high, and commodity prices could ease as supply chain bottlenecks are resolved. On balance, while near term inflation risks are elevated, we expect the Fed to stand by its looser for longer policy stance in the foreseeable future.
  •  In the FX markets, the ZMW remained on the defensive yesterday closing further north of 22.400 according to Reuters data.  Meanwhile, the USD remains firmly on the defensive for now ahead of the FOMC minutes later in the day that are likely to reaffirm the Fed’s commitment to keeping monetary policy loose for an extended period of time. Monetary policy will likely hold the key on how the USD behaves through the months ahead and for now, it will likely debase the USD. Inflation is rising, interest rates are low, fiscal risks are high with Biden set to push harder for more fiscal support, all of which has encouraged America’s twin deficits. Technically, the USD is on the defensive and set to lose even more ground.

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Nicholas Kabaso

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