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(LUSAKATIMES) Bank of Zambia sets benchmark interest rate at 9%

Bank of Zambia sets benchmark interest rate at 9%
TIME PUBLISHED - Friday, March 30, 2012, 4:40 am

Bank of Zambia yesterday rolled out a monetary policy framework to replace money-supply targeting, setting the inaugural benchmark interest rate at 9 percent, which analysts said signalled significant monetary tightening. The rate will come into effect on April 2.

International analysts said the new benchmark represented monetary tightening, most notably because the central bank’s overnight lending facility – the rate it charges commercial banks as a lender of last resort – is due to be set at 250 basis points above the policy rate.

“This is a significant tightening,” said Razia Khan, head of Africa research at Standard Chartered in London. “From levels of around 6 percent previously, overnight rates should now fluctuate within a 7-11 percent band.”

The new rate, which has been in the pipeline for more than two years, should also add more transparency to what is already an attractive frontier market for international bond investors chasing after high yields.

Unlike its counterparts in East Africa, Zambia has managed to keep a lid on inflation in the last 12 months, due in part to the relative stability of its currency, the kwacha, against the dollar.

However, since populist opposition leader Michael Sata was elected president in September, the kwacha has weakened from around 5,000 to 5,300 amid concerns about more state pressure on foreign investors, particularly in the mining sector.

Bank of Zambia (BoZ) deputy governor Bwalya Ng’andu said the effect of kwacha weakness posed a risk to non-food inflation, although stable food prices in the rapidly expanding agricultural producer should moderate the overall picture.

“The bank has weighed the inflation risks and has determined that average inflation during the policy-related period would remain below 7 percent,” he told a news conference to announce the new rate.

Under Sata’s predecessor, Rupiah Banda, the central bank had made clear it wanted to introduce a benchmark interest rate, although Sata’s firing of BoZ governor Caleb Fundanga shortly after taking office had cast doubt on those plans.

One of Sata’s policy priorities has been to cut the cost of credit for Zambia’s businesses and its 13 million people in order to stimulate growth beyond the mining sector.

With the reforms, Zambia is marching in the footsteps of other frontier African states, most recently Uganda, which launched a benchmark rate and inflation target last July to tame inflation that had soared to a 17-year high of 16 percent.

The new policy took time to bed down, and inflation shot up to more than 30 percent in the final quarter of 2011 before a flood of foreign cash into high-yielding domestic debt reversed a slump in the shilling, cutting the cost of imports

[Reuters]

Labels: BOZ, INTEREST RATES, LENDING RATES, STANCHART

posted by MrK @ 8:47 AM