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Inflation data takes center stage

February 25, 2021by Nicholas Kabaso
  • CPI and trade data headline the domestic data card today. Headline inflation in Zambia is sitting at an almost 5-year high and going forward, risks to the inflation outlook are tilted to the upside. Specifically, policymakers expect inflation of 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. That said, improved food supply and subdued aggregate demand to some extent could, however, mitigate inflation.    
  • On balance, the Bank of Zambia (BoZ) is likely to maintain a cautious policy stance amid risks to the inflation outlook. Recall at its last meeting the BoZ stated that it “stands ready to adjust the policy rate upwards further should inflationary pressures persist”.   
  • On the political front, United Party for National Development (UPND) President Hakainde Hichilema announced that the opposition alliance formed to unseat the ruling Patriotic Front (PF) will now be called the UPND alliance. While it was not clear which parties will be part of the alliance, a unified front of opposition parties is seen as the best way of challenging President Lungu in the upcoming elections.  
  • The Fed has provided the fuel for copper to take the next leg higher this morning. The Fed Chairman stated yesterday that it may take longer than three years for inflation to reach the central bank’s target, which suggests that the Fed will leave rates on hold for the foreseeable future. This coupled with broad based G7 government stimulus has spurred the hopes of a strong rebound in economic activity which is driving the bullish copper narrative. 
  • 3m LME copper hit a high of $9617/tonne a level not seen since August 2011. This is only marginally below the record high of $10190/tonne achieved in February 2011. It would seem that predictions by the likes of Goldman Sachs of a $10000/tonne price point may be hit sooner than later.   
  • As mentioned earlier, Fed Chairman Powell yesterday  reiterated the Fed’s commitment to keep policy loose for as long as it took to achieve full employment and achieve its inflation target. It once again confirms that the central bank will continue to support balance sheets through its asset purchase programme and ensure that government debt service costs will be kept in check. The downside is that there are distortions that arise, but for now, policy makers will feel that this is the lesser of two evils.    
  • Speaking of distortions, it has surprised people to see the strength of the US housing market. However, the pandemic has helped people real-ise the value of having a nice home and the low interest rates and QE renders loans very cheap and access to loans easy. Prices of homes are also rising enticing a speculative element and so it seems likely that the housing market will continue to benefit from the ultra-accommodative monetary policy that the Fed has committed itself to.      
  • The Fed also confirmed that its Fedwire Funds, Fedcash and other clearing services have resumed their normal function after a three-hour long disruption yesterday. These clearing services form the backbone to the banking system and the disruption therefore caused a temporary halt of activity. The ultimate impact is likely to unwind relatively quickly.                 
  • The USD is once again looking vulnerable. Although it has not broken materially below the 90.0 index level on the USD index, it is trading heavy and the improved sentiment on stock markets may see the USD erode a little weaker through the course of the day, especially with the Fed having reaffirmed its commitment to loose monetary policy. Improved risk appetite is expected to weigh on the USD’s safe-haven attraction and may trigger further gains on most currencies vs the USD.
  • On a YTD basis, it is worth noting that the Kwacha has been the third-worst performing African currency against the USD, down by over 2.50%. A shortage of dollars, challenging fiscal dynamics, and deeply negative real rates are some of the factors that have weighed on the local unit.

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Nicholas Kabaso

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