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Benchmarked interest rate planned for Zambia

Zambia’s central bank said on Tuesday it would introduce a benchmark interest rate from the beginning of April to replace the money-supply targeting that has been its major policy lever.

A Bank of Zambia statement said the first policy rate would be announced on March 29 and come into effect on April 2, and would provide financial markets with a “credible and stable anchor for setting interest rates”.

“The increased reliance on interest rate policy-based instruments is expected to provide a relatively more transparent and efficient process through which the Bank of Zambia can better anchor inflation expectations,” it added.

Analysts welcomed the long-awaited reform by Africa’s biggest copper producer, saying it would add more policy transparency to what is already an attractive frontier market for international bond investors chasing after high yields.

“It’s a good starting point towards the promise of greater price stability,” said Razia Khan, head of Africa research at Standard Chartered in London. “It brings the country that much closer, potentially, to an inflation-targeting regime.”

Unlike some of 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.

Slowed inflation
Inflation slowed to 6% in February, its lowest level in 10 years, after falls in the cost of food and non-alcoholic drinks.

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

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

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

Zambia is marching in the footsteps of the Bank of Uganda, which launched an inaugural benchmark lending rate and an inflation target in July last year to try to tame inflation that had soared to a 17-year hgh of 16% in May.

The new policy took time to bed down, and inflation shot to more than 30% 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.

It is not known if Zambia will also introduce an inflation target. — Reuters

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