Risks and Challenges

... Dr. Kalyalya says the decision BoZ has made to hike policy rate by 50 basis points is to combat persistent inflation

By Francis Maingaila

Lusaka, Zambia24 (12 - 11 - 2024 ) — The Bank of Zambia (BoZ) has raised its Monetary Policy Rate (MPR) by 50 basis points to 14.0 percent to address persistent inflation, which has remained above the central bank’s target range.

.Dr. Danny Kalyalya, Governor of BoZ, made the announcement on November 13, following the Bank’s Monetary Policy Committee (MPC) meeting.

Dr. Kalyalya explained that inflation averaged 15.5 percent in the third quarter of 2024, up from 14.6 percent in the previous quarter.

In October, inflation increased further to 15.7 percent, driven by rising food prices, particularly maize, fish, and vegetables, as well as higher energy costs, including recent electricity tariff hikes.

"The decision to increase the policy rate was necessary to steer inflation back toward our target range of 6-8 percent," Dr. Kalyalya said, adding that inflation is expected to remain high, with projections of 15.0 percent for 2024 and 13.9 percent for 2025.

Dr. Kalyalya highlighted the impact of electricity tariff increases and the depreciation of the Kwacha.

He pointed out that the currency depreciated by 1.7 percent against the US dollar in the third quarter of 2024, an improvement compared to 3.8 percent in the second quarter.

"The pressure on the Kwacha is mainly due to increased demand for foreign exchange, influenced by a backlog in the market and expectations of interest rate cuts by the US Federal Reserve," he explained.

Foreign exchange reserves have increased to $4.15 billion, covering 4.26 months of imports.

Dr. Kalyalya noted that while the supply of foreign exchange from sectors like mining remains stable, the overall demand continues to put pressure on the currency.

The Governor also emphasized the importance of increasing local production to reduce reliance on imports.

"We must focus on substituting imports with locally produced goods," he said.

Dr. Kalyalya acknowledged the drought’s impact on agricultural production, which has led to a downward revision of the 2024 GDP growth forecast to 1.2 percent.

However, he expressed optimism about the mining, ICT, and financial sectors, which are expected to support economic recovery.

Dr. Kalyalya reiterated BoZ’s commitment to managing inflation and ensuring economic stability, stating that further action would be taken if necessary to preserve the purchasing power of the currency.