Maravi

‘Monetary policy alone won’t curb high inflation rates’

COMMENT - The key to curbing inflation is not higher interest rates (they are already prohibitive to most commerce), but increased production, starting with the agricultural sector. And production in a way that puts money in the pockets of especially rural people, which creates demand.

‘Monetary policy alone won’t curb high inflation rates’
Written by Florence Bupe
Friday, January 09, 2009 5:39:40 AM

ECONOMIC advisor Chibamba Kanyama has warned against implementing monetary policy in isolation as a solution to high inflation rates.

Commenting on the increase in the country’s inflation rate which currently stands at 16.6 per cent, Kanyama said although the Central Bank could use monetary policy to reduce the supply of money in a bid to address the increase in the rate of inflation, the measure, if used in isolation, could adversely affect the economy in the long run.

“The temporary measure [to curb high inflation rates] would be for the government to institute austerity measures. This would mean the Bank of Zambia would use monetary policy to reduce money supply,” Kanyama said. “However, monetary policy alone never solves inflationary problems. On the contrary, if implemented alone, it can hurt the economy in the long run as credit squeeze would reduce both consumption and supply.”

He advised that monetary policy should be coupled with deliberate government interventions to ensure that credit went to the private sector.

Kanyama further advised that there should be effective measures in place to stabilise the exchange rate.

And Kanyama noted that lending rates were likely to increase if the government implemented its plans to increase borrowing this year.

“The government plans to increase borrowing in the 2009 financial year from both the domestic and local markets. This is because the government anticipates a deficit in its revenues,” said Kanyama. “If the government goes ahead to increase borrowing, we expect very high interest rates in 2009. The high inflation levels to be triggered by food deficits by mid 2009 plus increased government borrowing will cause overall interest rates to hit the 33 to35 per cent margins.”

Labels: CHIBAMBA KANYAMA, INFLATION, INTEREST RATES

posted by MrK @ 5:40 AM