Market News

(Bloomberg) -- Zambia’s central bank hiked its key interest rate to the highest level since 2017 to arrest inflation and support the kwacha as the country battles the effects of its worst drought in four decades. 

The monetary policy committee lifted the rate to 13.5% from 12.5%, Governor Denny Kalyalya told reporters in the capital, Lusaka, on Wednesday. That matched the median estimate of four economists in a Bloomberg survey.

The decision to act was driven by a “persistent rise in inflation expectations, which left unchecked, are poised to undermine macroeconomic stability and efforts to robust and sustained growth,” the governor said. “Inflation is a thief, it really erodes your wealth. We must address inflation,” he said.

The key underlying factors fueling inflation include persistent depreciation of the kwacha against major currencies and rising prices of grain, vegetables and energy, he said.

Last week, the kwacha fell to a record low against the dollar before recouping some of the losses. The currency has come under pressure from delays in debt-restructuring talks and rising demand for foreign currency to pay for increased food and electricity imports because of shortfalls caused by the drought. Zambia relies on hydropower, which has been hampered by low water levels, for 85% of its electricity supply. 

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The kwacha weakened 1% against the dollar to 25.5000 by 12.35 p.m. in Lusaka.

The dry spell is expected to continue fanning inflation. Price growth accelerated at the fastest pace in 26 months in April and is projected to average 13.7% this year, compared with a previous forecast of 12.5%, Kalyalya said.  

It is predicted to average 9.8% next year and return to its 6% to 8% target band in 2026, when it will average 7.4% in the first quarter. 

The higher interest rate may further dampen economic growth. The International Monetary Fund expects the economy of Africa’s second-biggest copper producer to expand 2.3% this year, down from an earlier projection of 4.7%, because of the drought.

“The bank stands ready to take appropriate action should inflation persist above the 6%-8% target band,” the governor said. But he tempered that warning by pointing out that policymakers had to “strike a balance” between curbing price pressures and not acting with such aggression that it causes other problems in the economy.

--With assistance from Simbarashe Gumbo.

(Updates market movements in paragraph six and adds more comments from governor)