ECONOMIST Chibamba Kanyama has advised the Central Bank to maintain the monetary policy rate as the market is still adjusting to the downward modification which was made in May.
In an interview, Kanyama said adjusting the policy rate would be a huge risk on inflation.
“I would say they should maintain the policy rate where it is right now for the simple reason that it was just adjusted recently in May and companies, organisations, including commercial banks are still responding to that policy rate. So it hasn’t stabilised yet. There is still some huge response by the market, commercial banks haven’t even adjusted. Some of them are yet to adjust the interest rates to what is expected by the Bank of Zambia and we are still facing some liquidity challenges because the aim of reducing the policy rate to 9.25, the purpose of that was to pump liquidity into the system, increase liquidity into the system. The market is somewhat starved right now, there isn’t much liquidity yet into the system and therefore, because the only way it can go is maybe even lower, it is a little bit further but lowering it may hit on inflation. Inflation has stalled,” Kanyama said.
“Ordinarily, the monitory policy should be higher than it is now to stabilize the exchange rate, to strengthen the kwacha value as well as to bring down inflation. But as you have observed, inflation has not reduced at the rate we expected at this point in time, at this time of year when crop has come onto the market. It has marginally reduced but not significantly and there is risk of ending the year with a double digits inflation, which is very likely now. So monetary policy cannot increase now otherwise it becomes a huge risk to inflation, it becomes a danger to the exchange rate and at the same time, they cannot increase because the market is still responding.”
Kanyama said the system should be given chance to cool down before any adjustments are made.
“Liquidity is still very low and there hasn’t been a 100 percent uptake on the K10 billion covid fund by the Bank of Zambia and what has helped now is that the margin between the monetary policy rate and the recommended lending rate of that K10 billion has widened but to increase it, it will mean narrowing down again that policy rate and the interest rate recommended from the monetary policy rate. So it will not go well with commercial banks because they responded, now after they responded, they began to apply for that money, pumping it into the system. So it is just as good the Central Bank should allow cooling down. Cooling down simply means maintain it where it is to allow the market to fully respond to the policy rate announced in May,” said Kanyama.
The Bank of Zambia is on Wednesday expected to have a monetary policy committee announcement.
At the last meeting, the Central announced a reduction in the MPC rate by 225 basis points to 9.25 from 11.5 in a bid to mitigate the adverse impact of COVID-19 on financial sector stability, economic activity, and ultimately on people’s lives and livelihoods.