A man displays a 50,000 Kwacha note in Lusaka in this file picture.

Lusaka - Zambia's central bank increased its benchmark interest rate by 175 basis points to 12 percent on Friday after a heavy sell-off in the kwacha currency pushed it to an all-time low against the dollar.

In a statement, the bank's monetary policy committee said the pass-through effects of kwacha depreciation would impact inflation, with risks to the price gauge generally on the upside.

“The committee expects this adjustment to buttress the measures implemented in the recent past and consequently contribute to moderating inflationary pressures,” the Bank of Zambia said.

Earlier on Friday, the kwacha fell to 6.4500 per dollar, its weakest level on record and extending its losses this year to nearly 12 percent.

Traders said exporters were holding off on selling the greenback on speculation the local currency would weaken further.

The government last week lifted a ban on the use of dollars for domestic transactions but traders said the attempt to ease pressure on the kwacha appeared to have had little impact.

Last week Finance Minister Alexander Chikwanda said the recent slide in the kwacha, partly due to lower copper prices, was only temporary and the central bank would not deplete its reserves to try and defend the currency.

Friday's policy tightening should eventually allow the kwacha to retrace, while news of a planned second euro bond issue would rekindle investor interest, said London-based Standard Chartered Africa analyst Razia Khan.

“The outlook for copper earnings is a little less certain, but most people think that the kwacha is undervalued at these levels,” Khan said. - Reuters