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Inflation moves further away from the upper band of the BoZ’s target range

February 26, 2021by Nicholas Kabaso
  • Headline inflation accelerated further in February, coming in at 22.2% y/y from 21.5% y/y in the month prior, underpinned by food prices which rose at the fastest pace in at least a decade. Specifically, food price inflation accelerated to 27.3% y/y from 25.6% y/y in January. Non-food in-flation meanwhile fell to 16.2% y/y from 16.7% y/y. 
  • With inflation moving further away from the upper band of the  Bank of Zambia’s (BoZ)  6%-8% target range, risks exist for the bank to hike rates further in the coming months, as communicated at the last policy meeting. A Kwacha, which is down by nearly 3% on YTD basis, making it the second-worst performing African currency, is also driving inflation.
  • Meanwhile, Zambia’s trade surplus surged to ZMW 9.3bn in January from an upwardly revised ZMW 6.5bn (prior: ZMW 6.3bn) in December, marking a record high according to Bloomberg data. The record surplus was underpinned by a rise in outbound shipments while inbound ship-ments fell. Specifically, exports increased by 5.4% to ZMW 17.5bn while imports fell by 18.8% to ZMW 8.2bn. 
  • Opposition leader of the United Party for the National Development party President Hakainde Hichilema is of the view that Zambia’s creditors should have to take haircuts on repayment account, schedules, and interest rates.  According to Hichilema, this will make funds available for medicines, books, and clean water.
  • Copper prices hit new highs yesterday driven by stimulus led growth and the Fed that indicated an unchanged monetary policy for sometime to come.
  • This morning we have had a bout of risk off hit the market and this has resulted in some profit taking on long copper positions. This has how-ever opened the door for those who wish to participate in the next leg higher. Copper remains fundamentally sound, cash vs 3m copper has gapped to its widest in two years suggesting near term supply issues.
  • Reuters reported – Peru’s Southern Copper Corp, one of the world’s top copper producers, plans to push forward new and pending projects as demand from China and constrained supply helps propel a global price rally, an executive told Reuters on Thursday. Raul Jacob, the company’s vice president for finance, said in an interview the miner hoped to advance development of the sprawling $5.4 billion Chancas and Michiquillay projects under a new government which will come in after elections in April.
  • As US Treasury yields have risen to match dividend yields on US stock markets, investors are questioning the wisdom in persisting with such strong allocations to equities. Although this is not a sign that investors have turned bearish on the US economy and believe that the rise in yields will detract from overall growth, it is an indication that the rally in stocks may have gotten ahead of itself and that a correction is healthy and needed.
  • On the political front, the Democrat push to have a minimum wage increase of $15 p/h included in the $1.9trln stimulus package cannot be passed without Republican votes. Given the partisan approach to this bill, it is likely that the Republicans would push back. The Democrats will not want to stop pushing for the stimulus package however and will therefore take up the fight through another initiative.
  • Katherine Tai, President Biden’s top trade nominee backed tariffs as a legitimate tool to counter China’s state-driven economic model and vowed to hold China to its commitments. For all the complains about Trump’s trade policy, it is interesting to see how the Biden administration is not rolling back on it. They concede that gains were made and will not want to easily give them back. Heading into any negotiations with China, the US will want to hold as much leverage as possible. Trump’s trade policy stance offers them something to bargain with.
  • In the FX markets, the Kwacha remained under pressure yesterday, extending its journey north of 21.700. Heightened demand for hard currency amid limited flows is set to keep the local unit on the back foot next week.
  • A correction in equity markets coupled with the rise in bond yields recently has lent the USD some support. It has reclaimed its safe-haven status and if equities experience much more in the way of volatility, the USD will build on its base. Commodity prices have come under some pressure and technically speaking a short-term buy signal has been given which will give USD shorts something to think about. Given the size of the speculative net short position, a squeeze might emerge to see the USD popping higher through the week ahead if indeed equities continue to correct.

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Nicholas Kabaso

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