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Inflation continues to rise in Zambia

March 26, 2021by Nicholas Kabaso
  • Headline inflation quickened to a 5-year high of 22.8% y/y in March from 22.2% y/y in the month prior as food prices surged and the weakening of the Kwacha made imports more expensive. Specifically, food inflation came in at 27.8% y/y in March from 27.3% y/y, a record high according to ZamStats. Non-food inflation also contributed to the headline figure, coming in at 17.0% y/y from 16.2% y/y in February.
  • Yesterday’s release saw headline inflation in Zambia accelerate for a seventh straight month and move further away from the Bank of Zam-bia’s 6%-8% target range. While policymakers expect inflation over the next eight quarters to move further away from the upper bound of the target range they have however warned that they stand ready to adjust the policy rate upwards should inflationary pressures persist. Given the inflation outlook remains tilted to the upside amid persistent weakness in the Kwacha which is trading at record low levels, risks exist that BoZ could hike its policy rate again in the coming months.
  • Meanwhile, Zambia’s trade surplus narrowed to ZMW 8.1bn in February from ZMW 9.3bn in the month prior. The reading however compares with ZMW 2.4bn in the corresponding month of 2020.  A breakdown of the data shows that the surplus narrowed as a result of a decline in outbound shipments and an increase in inbound shipments. Specifically, exports fell by 5.1% in February while inbound shipments rose by 4.0%. While the trade surplus narrowed in February it nevertheless remains healthy and going forward, a bullish copper narrative should see the trade account remain supported in the coming months.
  • On the political front officials for the Zambian government and ambassadors of member countries of the European Union (EU), yesterday held a political dialogue focused on the upcoming August 12 general elections in Zambia. While commending the EU for sending an Exploratory Mis-sion to conduct preliminary assessments on the possible deployment of an election observation mission Zambia’s Foreign Affairs Minister as-sured that the elections will be held in a transparent manner in line with democratic tenets.
  • On the global front, The US bond market was the focal point yesterday with the 7-year auction receiving tepid interest for a second month in a row. The $62bn issuance sold at a high of 1.30% which was 2 bpts higher than where the bonds were trading ahead of the sale. The bid to cover ratio spoke volumes as well coming in below average at 2.23. This demonstrates the level of nervousness inherent in the market, it shows up the fragility of the system and now marks supply events as risk events.
  • Across the pond in the EU leaders have expressed their frustration over the massive shortfall in contracted AstraZeneca COVID-19 vaccine deliveries. This comes as the continent experiences a strong third wave of COVID-19. Inoculation levels are far behind those of the United Kingdom or the United States which has caused much embarrassment for those in charge. There is talk that the EU is considering a ban on ex-ports of the AstraZeneca vaccine until all the shots promised to the EU have been delivered. To date, out of the 300 million shots promised by June, only 100 million have been delivered.
  • The ECB has shifted its focus from bond volumes to bond prices according to ECB Board member Isabel Schnabel. This comes just weeks after the Central Bank announced a significant increase in the pace of bond buying. Reuters reported – “Our pledge to preserve favourable financing conditions shifts the focus from quantities – the amount of assets we purchase – towards prices – the conditions at which sovereigns, firms and households can access credit,” Schnabel, who is responsible for the ECB’s market operations said.
  • In the FX markets, the Kwacha which has taken a beating this week is expected to remain under pressure next week amid continued high de-mand for hard currency and a diminished supply. Meanwhile, the USD remains the outperformer as optimism surrounding an economic recov-ery gains traction coupled with a rise in US Treasury yields. The USD Index is currently trading through the 92.78 level at the time of writing and any positive data from the calendar today could well see the market make bee-line for 93.00. Moving over to other currencies we have the EUR supported ahead of the German business sentiment later today, but the single currency is still precarious given the souring of sentiment over renewed coronavirus lockdowns. Meanwhile the likes of the AUD and the ZAR have found their feet after stumbling recently.

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Nicholas Kabaso

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