BANK Of ZAMBIA
PRESS RELEASE ON MONETARY POLICY
Policy Rate Maintained at 15.5%
The Monetary Policy Committee (MPC), at its meeting on 11 and 12 May 2016, decided (o
maintain the Policy Rate at 15.5%. The Committee noted that inflationary pressures appear
to have peaked over the first quarter of the year with annual inflation ending the quarter at
22.2% and monthly inflation at 0.5% in March 2016. Further, in April annual and monthly
inflation declined 10 21.8% and 0.3%, respectively. The slowdown in the inflation rate
reflects mainly the relative stability in the exchange rate, which partially offset the effect of
high production costs induced by power rationing, decline in the supply of some food items
and the hike in taxes and customs duty on some non-food items. The Bank of Zambia
forecasts annual inflation to decelerate in the remaining quarters of 2016, with a sharp
decline in the fourth quarter of 2016 toward single digit levels. This is a significant
improvement in the inflation outlook compared to the February MPC projection. The
Committee noted that economic activity remained constrained, but the Government fiscal
oulturn showed some improvement and the current account deficit narrowed. Domestic
financial markets continue to be characterized by tight liquidity, higher imerest rates, low
demand for Government securities and slow credit growth over the first quarter. However,
liquidity conditions have eased somewhat in April and May, with an improvement in
subscription rates on Government securities. As the Bank transitions to the new monetary
policy framework, with a greater reliance on price signals, it has continued to rely on some
quantitative measures to address extreme volatility in the foreign exchange market. The
inlerbank rate may, therefore, be allowed 10 move outside the Policy Rate corridor reflecting
these exceptional circumstances and adjustment back into the corridor is likely to be gradual.
The Commitice looks to the consolidation of positive developments in inflation and fiscal
adjustment as key triggers 10 considering adjustments to the Policy Rate going forward.
Inflation rose moderately in the first quarter of 2016
Annual overall inflation increased moderately in the first quarter of 2016 to 22.2% in March
2016 from 21.1% in December 2015. The moderate increase in the inflation rate reflected
mainly the observed relative stability in the exchange rate, which partially offset the effets
of higher production costs induced by power rationing, lower supply of some food items, and
the January 2016 increase in the taxes and customs duty on cigarettes and selected motor
vehicles. Food inflation, although slowing, has kept overall inflation elevated, with food
prices remaining above five year averages on account of adverse weather conditions that led
toa significant reduction in regional supply and an increase in export demand for maize grain
and maize products, The Committee also noted that in April 2016, there was a slowdown in
annual inflation to 21.8%. On a month-on-month basis, the Committee noted that the inflation
rate had fallen from 6.2% in October 2015 to 0.5% in March 2016 and declined further to
1[Page0.3% in April 2016. Sustaining the current trend in monthly inflation will assure the
achievement of single digit inflation by the fourth quarter of 2016.
The global economic environment remained challenging
Over the first quarter of 2016, global economic growth remained generally subdued as the
downside risks that limited growth in 2015 persisted, Uncertainty surrounding the
sustainability of economic recovery in the Euro area and Japan, coupled with slowing growth
in the United States, added further pressure to the global economy. Gross domestic product,
‘growth in China slowed down due to weaker investment growth as the economy continues to
shift away from manufacturing to consumption. The slowdown in the Chinese economy has.
reduced commodity prices, dampening export earnings for emerging and developing
economies, including Zambia, that are dependent on commodity exports. Despite low copper
prices, Zambia's current account deficit narrowed as the decline in imports outweighed the
fall in exports, attributed mainly to the lagged effect of the exchange rate depreciation in the
last half of 2015
Monetary conditions reflected the tight monetary policy stance taken since November 2015
As indicated in the February 2016 MPC Statement, the Bank of Zambia maintained a tight,
monetary policy stance in the first quarter of 2016. The Policy Rate and the Overnight
Lending Facility rate were kept at 15.5% and 25.5%, respectively. Access to the Oven
Lending Facility window remained restricted to once a week and the statutory reserve ratio
fon bank deposits was maintained at 18%, to help stem growth in Kwacha liquidity. As a
result, the interbank rate rose to 26.9% at the end of March 2016, and remained above the
upper bound of the Policy Rate corridor and the Overnight Lending Facility rate of 25.5%.
The Bank did not deliberately undertake expansionary open market operations to bring the
interbank rate down. This was in order to help contain the persistent and rapid depreciation of
the Kwacha with its consequential adverse impact on inflation. The Kwacha depreciated by a
modest 1.4% to K11.14 against the US dollar at end-March 2016.
As the Bank transitions to the new monetary policy framework with a greater reliance on
Price signals, it continued to rely on some quantitative measures to address the extreme
volatility in the foreign exchange market, Accordingly, in the face of extreme volatility, the
interbank rate was allowed to stay outside the Policy Rate corridor. Adjustments back into the
corridor will depend on how quickly observed threats to inflation recede.
Domestic financial markets characterised by tight liquidity, higher interest rates, low
demand for Government securities, and slower credit growth
Trading in the interbank market increased by 27.2% to K33.6 billion, reflecting mainly the
concentration of liquidity in a few banks. Most banks continued to face constrained liquidity
conditions despite a slight increase in the current account balance to K14 billion from K1.1
billion in the previous quarter. Net Government securities maturities accounted for the
increase in the current account balance. Reliance on the Overnight Lending Facility and re-
discount of Treasury bills reduced significantly as liquidity positions of banks improved.
Participation of more non-bank financial institutions led to an increase in the subscription rate
for Government securities during the first quarter. In the Treasury bills market, the
2|Pagesubscription rate rose to 58.1% from 32.5%. The subscription rate on Government bonds
registered an even sharper increase to 38.1% from 4.0%. The outstanding stock of Treasury
bills and bonds however, fell by 10.5% and 0.7% to K9.0 billion and K10.1 billion,
respectively as maturities exceeded offers, enabling the Government to pay down part of its
domestic debt. Participation of foreign investors, however, declined further. The decline was
due to, among other things, risk aversion towards emerging and developing economies.
Yield rates on Government securities increased further amidst relatively tight liquidity
conditions. The weighted average Treasury bill yield rate rose to 27.4% from 20.7%, while
the weighted average Government bond yield rate increased to 27.5% from 25.9%.
Commercial banks’ nominal lending and savings rates generally rose. For instance, the
average lending rate increased to 27.0% from 23.9% while the savings rate for amounts
above K20,000.00 rose to 12.9% from 10.8%. The increase in interest rates is mainly in
response to the rise in funding costs and inflation. With the moderation in inflation, all real
interest rates picked up.
After declining by 5.3% in the previous quarter, credit contracted by a further 3.8% to K45.8
billion in the first quarter of 2016. This was driven mainly by tight liquidity conditions, high
funding costs, increased collateral requirements, and reduced risk appetite by banks. Broad
money also contracted by 4.9% to K44.9 billion due to a decline in the net foreign assets of
the Bank of Zam|
Economic activity remained constrained, fiscal performance improved, and the current
account deficit narrowed
Preliminary data indicate that domestic economic activity remained subdued mostly due to a
variety of factors including continued electricity shortages, cost and availability of credit,
increase in the cost of production attributed to the higher cost of imported raw materials, and
increased labour costs as employees worked outside regular hours to make up for lost
production occasioned by load-shedding schedules.
On the other hand, the current account deficit narrowed to US $168.6 million from US $482.5
million, as imports fell sharply relative to the contraction in exports. Imports fell by 23.0% to
US $1.7 billion while exports declined by 10.5% to US $1.6 billion. The fall in imports is
attributed to seasonal fluctuations in fertilizer requirements as well as the lagged effect of the
depreciation of the exchange rate of the Kwacha against the US dollar. The drop in copper
volumes and constrained domestic production largely accounted for the decline in export
‘earnings. The current account deficit was financed by the surplus on the financial account and
the drawdown of foreign exchange reserves to US$2.6 billion at end-March 2016, largely to
service external debt and pay for oil imports. This level of reserves represents 4.0 months of
import cover compared to 3.7 months at end-December 2015. The higher import cover
reflects a decline in imports in 2016.
Preliminary data indicate that over the first quarter of 2016, Government registered a small
fiscal surplus. The surplus was utilised on domestic and external debt amortisation.
Macroeconomic outlook remains challenging in the short-term, but is more positive over
the medium-term
3|PageThe extemal sector is expected to remain challenging with modest global growth and
relatively low commodity prices in 2016. On the domestic front, real GDP growth is
projected to improve marginally in 2016, but to strengthen significantly thereafter. ‘The
continuing rationing of power is expected to ease as additional power is brought on line and
the effects of El Nifio recede.
The Bank of Zambia forecasts annual inflation to decelerate in the remaining quarters of
2016, with a sharp decline in the fourth quarter. This is a significant improvement in the
inflation outlook compared (o the February MPC projection. In the second quarter of 2016,
inflation is projected to average 20.3%, partly reflecting improved supply of food during the
harvest season and relative stability in the exchange rate. The 9.7% forecast increase in maize
output for the 2015/16 production season, announced in the recent crop forecast survey
results, should assist in moderating food inflation. Inflation is projected to average 17.7%
the third quarter and to decline further to an average of 8.7% in the last quarter. Underlying
this inflation projection are relative stability in the exchange rate and expected fiscal
consolidation.
In addition, the Monetary Policy Committee noted, from survey data on business opinions
and expectations, that businesses are expecting lower inflation over the second quarter of the
year and increased investments a year from now. Survey data on credit conditions also
indicate that credit constraints are expected to ease somewhat.
The Bank of Zambia will continue to monitor domestic and external developments closely
and stands ready to take appropriate monetary policy measures to support price and financial
system stability. Price and financial system stability are key to macroeconomic stability,
which is essential for economic growth and development.
The next MPC Meeting will take place in August 2016
Issued by
A
Denny H Kalyalya
Governor
May 17, 2016
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