Monday, April 02, 2012
By Joan Chirwa-Ngoma
Mon 02 Apr. 2012, 13:00 CAT
INVESTRUST Bank says BoZ's setting of benchmark lending rates at nine per cent will reveal the Central Bank's monetary policy stance.
Welcoming the development yesterday, Investrust Bank managing director Friday Ndhlovu said the Bank of Zambia's decision will signal to the market its intentions regarding money supply, inflation rate expectation and other market factors that help in the determination of lending interest rates by commercial banks.
The Bank of Zambia has set the country's inaugural benchmark interest rate at nine per cent in a policy shift intended to broaden financial markets and augment ongoing government efforts to lower lending rates.
Last Monday, it announced the introduction of a Policy Rate, named BOZ
Policy Rate, effective today, April 2, 2012, to replace the money supply targeting that has previously been its major policy tool.
The policy rate allows 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 economic indicators that would guide BoZ Policy Rate adjustments, include, among others, output, expected inflation and the exchange rate.
"However, for it to succeed, government policy must be consistent and this must reflect in the intentions signalled by the central bank through the policy rate so as to avoid volatility in interest rates and other economic variables such as inflation. Interest rates volatility and unstable inflation would cause foreign players to shun the Zambian financial market due to high uncertainty risk," Ndhlovu said in an emailed statement issued by the bank's public relations manager Ackim Mwale.
"This could cause significant turmoil in the financial Market and could be difficult to reverse in the short term as has been the case in other markets that have adopted similar policies."
Ndhlovu warned that without consistency in policy direction, pricing for term lending would prove difficult for both lenders and borrowers as they would be unable to price the expected volatility with reasonable certainty.
"This is because the policy rate is determined using short term variables and in this case the policy rate will be reviewed monthly. It follows therefore that one can only be certain over a one month horizon," said Ndhlovu.
"Nevertheless, it will help to make interbank activity more efficient and transparent. For the public, it is important that the policy rate is not construed as the rate at which the borrowing public will access credit but is an indicative rate at which commercial banks will transact amongst each other and borrow at from the Central Bank as lender of last resort, within prescribed margins. This rate will be reviewed monthly depending on what the Central Bank wants to achieve as they implement monetary policy. Commercial banks will add their own margins which will vary from client to client depending on perceived risk."