MPR hiked to 14.5%

...Central Bank Moves to Curb Rising Inflation and Currency Depreciation

By Francis Maingaila
Lusaka, Zambia – (12-02-2025) – The Bank of Zambia (BoZ) has raised its Monetary Policy Rate (MPR) to 14.5%, a 50-basis-point increase aimed at addressing persistent inflation and stabilizing the local currency.

BoZ Governor Danny Kalyalya told journalists at a press briefing that the decision comes as inflation is expected to remain above the 6-8% target range over the next eight quarters.

"High inflation remains a major concern, and if left unchecked, it will undermine economic stability and erode the purchasing power of households," Kalyalya stated.

"We have therefore made the decision to raise the policy rate to contain inflationary pressures and anchor expectations."

He explained the rationale behind the decision, highlighting inflationary trends and exchange rate volatility.

"We have seen increased demand pressures, along with movements in the exchange rate, contributing to rising inflation. This adjustment is necessary to maintain price stability and ensure a sound macroeconomic environment."

Inflation is projected to average 14.6% in 2025, slightly higher than the 13.9% forecast in November 2024. While inflation is expected to decline to 10.6% by 2026, it will still remain above the target range.

"The rise in inflation is largely driven by the depreciation of the Kwacha and other factors such as higher imports due to reduced local production from the drought," Kalyalya noted.

"We hope this rate hike will anchor inflation expectations and bring inflation closer to our medium-term goal."

The Kwacha depreciated by 4.5% against the US dollar in the fourth quarter of 2024, up from 1.7% in the previous quarter, largely due to increased demand for food and energy imports.

The central bank’s actions are also aimed at managing the impact of these currency fluctuations.

In foreign exchange markets, BoZ reported that supply from the mining sector, which remains the main source of foreign currency, increased by US$60.1 million to US$526.2 million in the fourth quarter.

Despite this, market support from the Bank of Zambia decreased, with net support falling to US$197.8 million from US$230.8 million in the previous quarter.

Despite sluggish economic conditions, gross international reserves increased to US$4.31 billion, equivalent to 4.6 months of import cover, up from US$4.15 billion at the end of September 2024.

The increase was supported by project inflows from international financial institutions, including the World Bank and the African Development Bank.

Kalyalya acknowledged concerns regarding borrowing costs but stressed the importance of monetary stability.

"Tightening monetary conditions may have short-term effects on credit access, but in the long run, price stability benefits everyone by creating a predictable economic environment that fosters sustainable growth."

He reaffirmed the central bank's commitment to monitoring the economic situation and taking necessary action.

"We will continue assessing the impact of this measure and adjust accordingly. Our goal remains clear—ensuring stability and supporting long-term economic resilience."

Kalyalya emphasized that inflation control is key to economic resilience.

"Inflation control is critical to fostering investor confidence, maintaining consumer purchasing power, and ensuring overall economic stability. A disciplined monetary policy is required to navigate these challenges."

He also highlighted the central bank’s proactive approach in managing inflationary risks.

"We recognize the difficulties posed by external and domestic pressures, and we will remain vigilant. Any necessary monetary interventions will be made to sustain macroeconomic stability."

Kalyalya reassured the business community that the BoZ remains committed to creating an environment conducive to investment and long-term economic growth.

"While the decision to raise rates may seem restrictive in the short term, it is ultimately aimed at protecting businesses and households from prolonged inflationary shocks."

BoZ’s rate increase comes as Zambia’s GDP growth is expected to fall significantly in 2024, projected at just 1.2%, down from 5.4% in 2023.

However, the economy is forecasted to rebound in 2025, with growth anticipated to reach 6.6%, driven by a recovery in agriculture and energy production, along with continued expansion in sectors such as ICT and financial services.

He underscored the bank’s commitment to ensuring macroeconomic stability amid ongoing inflation and currency challenges.

"We are determined to maintain a monetary policy that supports long-term economic growth, price stability, and financial sector resilience," Kalyalya concluded.