Lusaka - Zambia’s central bank raised its benchmark interest rate on Friday for a second consecutive meeting to a record high to stem a slide in the currency and tame inflation.
The monetary policy committee (MPC) increased the key lending rate to 12 percent from 10.25 percent, the central bank said. Last month, the MPC increased the rate by half a percentage point.
“It’s certainly a big increase” that would probably arrest the kwacha’s fall in the near term, Shilan Shah, an economist at Capital Economics in London, said. “You might see a bit of a rally in response.”
Zambian consumer prices are rising after the government curbed subsidies on maize and fuel last year, while a weakening currency has made imports more costly. The kwacha has declined 11 percent against the dollar this year, ranking it as the worst performer in Africa after Ghana’s cedi.
“Risks to inflation are generally on the upside,” the Bank of Zambia said on Friday. “It is expected that the pass-through effects from the depreciation of the exchange rate will impact on inflation.”
The rate increase might lead to slower growth in the economy, Shah said. It would probably only support the kwacha in the short term, because the government’s fiscal policy “remains far too loose” and would continue to undermine the currency, Shah said.
Slower growth in China would also affect the economy of Africa’s second-biggest copper producer and put pressure on the kwacha, Shah said.
A week ago Finance Minister Alexander Chikwanda scrapped two laws restricting trade in foreign currency in a bid to support the kwacha.
Inflation had quickened to 7.7 percent this month, the highest since November 2011, the Central Statistical Office said last week. – Bloomberg