BoZ raises monetary policy rate to 14%

By GRACE CHAILE

THE Bank of Zambia (BoZ) has raised the monetary policy rate (MPC) by 50 basis points to 14 percent to guide the inflation rate towards its target range of six to eight percent.
BoZ Governor Dr. Denny Kalyalya has stated that the increase was necessary due to actual and projected inflation rates remaining above this target.
Speaking at the quarterly monetary policy briefing yesterday, Dr. Kalyalya stated that the Monetary Policy Committee considered complementary liquidity management measures, foreign exchange market reforms, the economic fragility following a recent severe drought, and the stability of the financial system.
In the third quarter of 2024, annual inflation continued to climb, averaging 15.5 percent, up from 14.6 percent in the previous quarter.
In October, inflation rose to 15.7 percent from 15.6 percent in September, driven by low supplies of maize, fish, and vegetables, increased demand for solid fuels amid ongoing electricity load management, and depreciation of the Kwacha.
“While inflation is projected to average around 15 percent in 2024, the projection for 2025 is now higher at 13.9 percent compared to the 12.7 percent forecast in August. This elevated profile is due primarily to the recent depreciation of the Kwacha and an increase in electricity tariffs, largely impacted by the drought,” he said.
Dr. Kalyalya indicated that risks to the inflation outlook remain predominantly on the upside, with concerns about higher maize prices and persistent Kwacha depreciation.
However, BoZ was projecting inflation to decline to nine percent in the first three quarters of 2026.
On the foreign exchange market, he reported that Kwacha depreciation against the US dollar moderated to 1.7 percent in the third quarter from 3.8 percent in the second quarter. He attributed the improvement in market conditions to a reduced backlog in demand, thanks to an increased supply of foreign exchange and a relatively weaker dollar—partly influenced by expectations of a rate cut by the U.S. Federal Reserve.
The Central Bank Governor noted that recent reforms in foreign exchange operations had stabilised the market, with the majority of foreign exchange inflows coming from the mining sector (US$232.1 million), foreign financial institutions (US$61.6 million), and the construction sector (US$49 million).
However, mining tax contributions directly remitted to the Bank of Zambia (BoZ) fell to US$233.8 million in the third quarter from US$252.5 million in the second quarter, mainly due to lower copper export revenues.
With greater foreign exchange availability, BoZ reduced its market support to US$230.8 million from US$275 million in the previous quarter. Additionally, gold purchases in the third quarter amounted to US$7.3 million, bringing BoZ’s total gold holdings to a market value of US$217.2 million since local gold purchases began in December 2020. Foreign exchange market activity also rose significantly in the third quarter, with interbank turnover increasing to US$324.4 million from US$77.7 million in the second quarter, the highest level since early 2021.
Demand for foreign exchange peaked at US$126 million on July 17 but dropped to US$7.4 million by the end of September.
However, demand surged again in the fourth quarter, reaching US$52.7 million by November 4, resulting in a 3.1 percent depreciation of the Kwacha to K27.29 per dollar as of November 12.
Dr. Kalyalya also highlighted that gross international reserves rose to US$4.15 billion by the end of September, equating to 4.6 months of import cover, up from US$3.91 billion, or 4.3 months of cover, at the end of June, largely due to World Bank project disbursements and net mining tax purchases.