Zambia Raises Rate for First Time Since 2015 to Help Kwacha

LUSAKA (Capital Markets in Africa) – Zambia’s central bank raised its key interest rate for the first time since November 2015 in a bid to stabilize its currency, which is the world’s fourth-worst performer against the dollar this year.

The Bank of Zambia raised the rate to 10.25% from 9.75%, Governor Denny Kalyalya told reporters Wednesday in Lusaka, the capital.

Key Insights

• While the southern Africa nation’s annual inflation rate of 7.7% in April is within the central bank’s target range of 6% to 8%, effects from the kwacha’s 13% slide against the dollar this year could push it beyond that range. The increase in borrowing costs could help support the currency.
• The inflation rate will probably remain above the target band for the next eight quarters, Kalyalya said.
• Food prices could rise further after Zambia’s harvest of corn, a staple, fell to an estimated 2 million metric tons this year, the lowest in a decade.
• “An upward adjustment will certainly hurt the real economy,” Chibamba Kanyama, a Lusaka-based economist, said by email before the decision. “We are, however, better off hurting the economy via high policy rate than waiting for inflationary pressure to frustrate long-term investment.”
• Foreign-exchange reserves dropped to $1.4 billion at the end of March, he said. That compares with a peak of almost $4 billion in 2015.