Zambia: Central bank hikes policy rate by 25bps to 9.5%

• Central bank cites above-target inflation as main factor
• Inflation is seen to remain above target at 10.5% this year, 8.4% in 2024 and Q1 2025
• Growth remains fragile with central bank forecasting slowdown to 4.2% this year

The Bank of Zambia hiked the key policy rate by 25bps to 9.50% at the MPC meeting held this week. Central bank governor Denny Kalyalya said that one of the main factors that were taken into consideration was that inflation is expected to remain above the 6.8% target over the forecast horizon (24 months) albeit it is seen to continue slowing. Inflation averaged 9.6% in Q1 from 9.8% y/y in Q4 2022 but remained elevated, Kalyalya said, attributing the inflation pickup in April (to 10.2% y/y from 9.9% in March) to higher maize prices due to stronger regional demand for the commodity, and the lagged effect of the kwacha depreciation. The central bank expects inflation to average 10.5% this year, 8.4% in 2024 and 8.4% in Q1 2025. The outlook reflects the recently approved electricity tariff hikes and the elevated maize prices, although the forecasts are still lower than those in February 2023. The risks to the outlook include further delays in debt restructuring talks, tighter global financial conditions, further rise in maize prices, and the impact of a prolonged Russia-Ukraine conflict on food and energy prices.

Aside from the inflation outlook, the central bank took into consideration the fragile economic growth (which are 4.7% in 2022 was considered not enough compared to population growth), the existing vulnerabilities and risks in the financial sector, and the potential benefits form the successful conclusion of the debt restructuring talks through the exchange rate channel. With regards to economic activity, the central bank expects it to slow down to 4.2% this year and rebound to 4.8% in 2024 and 4.7% in 2025, supported by the recovery in agriculture and mining sectors, as well as sustained growth in ICT, manufacturing, transport, and financial and insurance services. The risks to the outlook include global slowdown, tight global financial conditions, adverse weather, and elevated energy and food prices due to the Russia-Ukraine conflict.