ECONOMIST Chibamba Kanyama says he expects the Central Bank to increase the monetary policy rate as it is the only way to stabilize inflation and the exchange rate.
In an interview, Kanyama noted that the rise reduction in the policy rate was speculative and has seen an increase in inflation and a relatively volatile exchange rate.
“The last MPC announced one of the lowest rates in Zambian history, coming against the backdrop of high inflation rate, volatile exchange rate, low demand, low economic growth and lower than expected industrial performance, with some companies facing threats of closure due to the COVID 19 pandemic. The Bank of Zambia had to decide between tightening market liquidity so as to reduce the inflation rate and the volatile exchange rate/Kwacha depreciation and, on the other hand, stimulate industrial output via high market liquidity. The Bank chose the latter with the hope that high demand for goods and services would support companies to produce more, the consequence being more goods chasing less money. That was highly speculative of course because what we have witnessed following that generous pronouncement is an increase in inflation and a relatively volatile exchange rate. The key development following the recent MPC was the termination of contract for the Bank of Zambia governor. Speculation by the market connected the dismissal to what was seen as wrong diagnosis of monetary stress and related mitigatory measures,” Kanyama said.
He said the new governor was expected to rebalance market liquidity by increasing the policy rate.
“The new Governor, Christopher Mvunga, is likely to do what is expected of Bank of Zambia when faced with high inflation and volatile exchange rate. He will seek to rebalance market liquidity by taking some of it from the market. The expectation therefore is an increase in monetary policy rate. I do not anticipate a huge increase as that would still shock the economy given the prevalence of COVID 19 effects to industry,” said Kanyama.
“He also faces competing demand to release liquidity as we close the financial year, but he has to bite the bullet, stabilize inflation and the exchange rate because the two variables have a long lasting impact on investment. Just as much as industry seeks for higher levels of demand, it is a given that whatever earnings they are making are impacted by inflation and the high cost of imported raw materials. It can only be one way at this moment and that is increasing the MPR even if the circumstances are still shaky and challenging.”
The Bank of Zambia is on Wednesday, November 18, expected to make a policy committee announcement.