Bank of Zambia Raises Key Interest Rate to Curb Inflation
Zambia’s central bank raised its key interest rate for a second time this year, bucking a global easing trend, in a bid to support its currency and tame inflation.
The Bank of Zambia increased the rate to 11.5% from 10.25%, Governor Denny Kalyalya told reporters Wednesday in Lusaka, the capital. That’s the highest level since May 2017.
Key Insights
The central bank faces a trade-off between stabilizing the kwacha to help control inflation and boosting an economy that expanded at the slowest since least the first quarter of 2016 in the three months through June.
Inflation accelerated to 10.7% in October, the highest level in three years, as the worst drought in almost four decades in the southwest of the country caused crop failure. Kalyalya said while the MPC was mindful of the slowdown in economic growth, the upside risks to inflation have increased and there is a need to restore macro-economic stability.
The central bank sees the rate staying above the 8% upper end of its target range until at least 2021.
The lack of rain also drastically curbed output at the hydropower dams that Zambia relies on for about 80% of its electricity generation, and the resultant power cuts that last more than 15 hours a day are weighing on the economy.
The electricity cuts also mean that many businesses run on generators, increasing their input costs because the kwacha’s 18% drop against the dollar this year has pushed up fuel prices. The nation’s power utility has asked the energy regulator to allow it to more than double prices, which will add to inflationary pressure. The Energy Regulation Board said it would announce new energy tariffs this month.
