Maravi

BoZ to introduce fixed interest benchmark

BoZ to introduce fixed interest benchmark
By Chiwoyu Sinyangwe
Wed 28 Mar. 2012, 13:00 CAT

THE Bank of Zambia has introduced a fixed benchmark interest rate, in a policy shift intended to broaden financial markets and augment ongoing government efforts to lower commercial bank lending rates.

The policy rate would allow BoZ to clearly signal its monetary policy stance to the market, providing financial market participants with a credible and stable anchor for setting of interest rates on their credit products. The country has operated an open market system since it liberalised economic policies in the early 1990s.

Under the current regime, Zambian commercial banks determine their own lending rates without any official reference point.

Since coming into power, the Patriotic Front has announced sweeping reforms to the monetary policy management, with a view to lowering the cost of lending in the country to ease access to working capital by local entrepreneurs.

Some of the changes announced by the government included lowering the reserve ratio for both local and foreign currency deposits to five per cent from eight per cent previously.

To boost the fall in lending rates, the government also reduced the corporate tax for the banking sector from the previous 40 per cent to 35 per cent to provide more liquidity to the local commercial banks "to lend cheaply".

In a statement yesterday, BoZ head of public relations Kanguya Mayondi announced a BOZ policy rate with effect from April 2, 2012.

"A policy rate is utilised to influence monetary and credit conditions in an economy. This policy rate will, in this regard, allow the BoZ to signal an increase or a decrease in the price of credit in the market," Mayondi stated.

"To announce changes to the BoZ Policy Rate, the Bank of Zambia will be issuing a monthly communiqué covering, among other things, factors taken into account when arriving at its decision on the BoZ Policy Rate as a means of explaining its monetary policy stance. The first BoZ Policy Rate shall be announced on Thursday, March 29, 2012."

Mayondi stated that increased reliance on interest rate policy-based instruments was expected to provide a relatively more transparent and efficient process through which BoZ could better anchor inflation expectations.

"Following this reform, it is expected that the standard practice of quoting the price of loans and similar credit products by all commercial banks will be BoZ Policy Rate plus a margin," he stated.

"The margin will be set by commercial banks on the basis of their risk premium assessments. This transparent way of pricing credit products will enhance many stakeholders' business planning processes and assist in efficiently managing their financial commitments. Further, this will enable borrowers to understand the basis upon which commercial banks price their credit products."

Mayondi stated that the Central Bank, in collaboration with other stakeholders, would continue to work on building an effective and efficient financial system which is expected to benefit all stakeholders accordingly.

Labels: BOZ, INTEREST RATES, LENDING RATES

posted by MrK @ 5:36 PM