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Headline inflation in Zambia slows to an almost 2-year low in January

January 28, 2022by Nicholas Kabaso
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Local Market Commentary

  • Headline inflation in Zambia slowed further in January, coming in at 15.1% y/y from 16.4% y/y in the month prior. This was the softest pace of price growth in the economy since March 2020. Meanwhile, prices climbed 2.6% on the month, the highest level in a year. A breakdown of the data from ZamStats showed that food price inflation slowed to 16.9% in January, compared with 19.9% in December. Meanwhile, non-food inflation accelerated to 12.7% from 12.1%, driven by increases in pump and transport prices. 
  • The continued slowdown in headline inflation in Zambia will likely ease the pressure on policymakers to raise borrowing costs at the first meeting of the year next month. Policymakers may want to assess the impact of a 50bps rate increase in November and the removal of fuel subsidies the following month, suggesting there is room to keep borrowing costs unchanged. That said, it is worth noting that inflation in Zambia remains above the Bank of Zambia’s 6%-8% target range with upside risks to the outlook present. 
  • A continued depreciation in the Zambian Kwacha (ZMW), the removal of fuel subsidies, and an anticipated 13% increase in power tariffs are factors that are likely to place upward pressure on prices in the coming months. The ZMW has come under some notable selling pressure this year, with the local unit currently ranked the worst performing African currency against the USD on a year-to-date basis among those tracked by Bloomberg. The ZMW, down by almost 7%, has weakened as demand for hard currency remains higher than actual inflows. This bearish bias is set to persist next week amid limited supply of hard currency.
  • Meanwhile, Zambia’s trade surplus narrowed in December, coming at ZMW 6.6bn from ZMW 7.2bn in the month prior. However, the December reading compares with a surplus of ZMW 6.5bn in the comparable period a year earlier. A breakdown of the trade data shows that exports decreased by 7.5% to ZMW 17.5bn in December 2021 from ZMW 18.5bn in November 2021, while imports fell by 7.4% to ZMW 10.9bn.
  • The broader base metal complex finished yesterday’s trading session in the red with a stronger dollar and thoughts of tighter monetary policy across the globe sapping bullish sentiment. The 3m LME benchmark shed 1.37% to close at $9782.00/tonne and the losses have extended this morning with another 0.5% worth of losses booked at the time of writing.
  • Low copper inventories are however capping losses with the on-warrant copper stocks tracked by the LME slipping to a two-month low of 65 750 tonnes.
  • Moving over to the U.S., Earnings results have been good this week, and yesterday this was again highlighted when Apple beat market expectations. Just as good as the earnings results were, it was also encouraging to hear Apple speak of the easing of chip shortages and a resumption in more normalised supply chain performances. This will bode well for global growth as the headwinds gradually ease to help corporates resume normal activity and leverage off the streamlining and efficiencies they have extracted through the pandemic.
  • On the geopolitical front, the U.S. and Russia are keeping diplomatic channels open, although there has been no breakthrough as yet. Nonetheless, it is good that both sides are still negotiating, reducing the chances of a Russian invasion. Russia, for its part, has complained that the U.S. is still ignoring its main concerns. The core scenario is that a geopolitical crisis is avoided as it is in neither Europe nor Russia’s interests to begin military action.
  • The past week has been a kind one for the USD. It has surged impressively following the FOMC decision and statement, which confirmed that the Fed would complete its taper by March and could start lifting rates around the same time. Add to that the strong data and earnings results, and there are no downside risks to growth or employment that the Fed has to worry about, implying that the USD could still rally further. Technically, it has smashed through the prior highs achieved in Nov and Dec or 2021 and is now trading at the highs last seen in July 2021. It appears to be an important technical break that opens the door for more such gains in the future.

Rand and International FX Commentary

  • The past week has been a kind one for the USD. It has surged impressively following the FOMC decision and statement, which confirmed that the Fed would complete its taper by March and could start lifting rates around the same time. Add to that the strong data and earnings results, and there are no downside risks to growth or employment that the Fed has to worry about, implying that the USD could still rally further. Technically, it has smashed through the prior highs achieved in Nov and Dec or 2021 and is now trading at the highs last seen in July 2021. It appears to be an important technical break that opens the door for more such gains in the future.
  • Concerning the ZAR, yesterday’s MPC decision and statement could be described as a more dovish hike. Although it met market expectations of a 25bp hike, year-end repo estimates for the year were revised lower in the QPM despite near-term inflation being revised higher, while growth estimates were also lowered. SARB Gov Kganyago indicated that the SARB would look through the temporary price shock and made it clear that while headline inflation was high and rising, core inflation was still low and comfortably below the midpoint of the inflation target range. If anything, investors would be forgiven for believing that the SARB might be able to keep monetary policy more accommodative than what is reflected in the QPM. On the forecasts of the QPM, Kganyago added that it was but just one input into the MPC meeting and did not dictate what decisions the committee should make.
  • The result was a ZAR that came under pressure, although that is more likely a function of a surging USD than it is anything that the SARB said or did. Emerging markets more broadly have been under pressure, and the rise in the volatility of equity markets has been a catalyst for rotation away from EMs and back towards safe-haven assets. In other words, this is not a ZAR specific development rather than a broader USD and emerging market one.
  • With key risk events out of the way, markets can settle back down, and in America’s case, focus can now shift back towards the earnings results, which have beaten market expectations by quite some margin. Wall St has resisted the temptation to sell off aggressively, and bargain hunters have been quick to buy up in cheaper rated stocks. Such support for the equity market will offer the ZAR some assistance, so ahead of the weekend, it will be interesting to see if the USD-ZAR can consolidate this week’s gains or whether investors will regain some of their risk appetites. 

Nicholas Kabaso

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