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By Matthew Hill
Zambia’s central bank is set to raise its benchmark interest rate for the first time in a year as inflation surged to a six year high, triggered by the world’s worst-performing currency.
The Bank of Zambia, led by Governor Denny Kalyalya, will probably increase the policy rate by 1.5 percentage points to 14 percent on Tuesday, according to two out of three economists surveyed by Bloomberg. Ridle Markus at Barclays Africa Plc in Johannesburg predicted the rate will rise to 14.5 percent. Kalyalya is scheduled to announce the rate decision at a press conference that begins at 10 a.m. local time on Tuesday.
“Growth is slowing, weighed down by weaker copper prices and mine closures,” Razia Khan, head of Africa economic research at Standard Chartered Plc in London, said in an e-mailed note to clients. “But higher inflation and kwacha weakness will require some policy response.”
Zambia’s economy is facing one of its worst crises in years. Consumer prices rose 14.3 percent in October from a year ago, almost double the pace in September, triggered by power shortages and the kwacha’s 49 percent plunge against the dollar this year, the most of 155 currencies tracked by Bloomberg.
Policy makers in the southern African nation face the challenge of reining in inflation at a time when economic growth is slowing. Barclays is projecting growth of 3.4 percent this year, which would be the slowest pace in 17 years.
“A hike in the policy rate may have negative implications as investors may find it costly to borrow,” Brian Chintu, head of investments at Madison Asset Management in Lusaka, said in an e-mailed reply to questions. “This ultimately means even the individuals who would ideally borrow to construct their house or invest in a small poultry project will think twice before they approach the lending institutions.”
Chintu, whose forecast wasn’t part of the Bloomberg survey, is predicting the rate may be increased to about 15 percent or higher. The central bank last raised it 12 months ago by 50 basis points. Its biggest increase was 175 basis points in April 2014.
The kwacha fell less than 0.1 percent to 12.5761 against the dollar as of 4:25 p.m. in Lusaka on Monday. Yields on the dollar bond due July 2027 fell 9 basis points to 11.44 percent.
bloomberg.com
