Zambia's central bank left its monetary policy rate unchanged at 9.75 percent but warned that "should the rising risks to inflation materialize, an upward adjustment in the Policy Rate may be necessary to prevent inflation from persistently staying above the target range."
The Bank of Zambia (BOZ), which has maintained its key rate since February, said upside risks to inflation in the near term continue to dominate and inflation is projected to exceed the upper bound of the bank's 6.0 - 8.0 percent target range in the forecast period to the third quarter of 2020.
However, BOZ expects inflation to return to toward the midpoint of its target range thereafter and if inflation turns out to be lower than expected in the fourth quarter of this year, inflation may return to the range faster than expected.
Since February BOZ has kept its rate steady after wrapping up an easing cycle begun in February 2017 that included total rate cuts of 575 basis points.
Inflation in Zambia rose to a 2018-high of 8.3 percent in October from 7.9 percent in September, pushed up by higher food prices, a 19.5 percent plunge in the kwacha's exchange rate in September and higher oil prices.
Until mid-September the kwacha was relatively stable against the U.S. dollar but it fell sharply against a backdrop of sustained negative sentiment following downgrades of the country's credit rating by both Moody's and Standard & Poor, higher pipeline demand for oil and the general rise in the dollar.
"The depreciation was despite net supply of foreign exchange, mainly from the mining and construction sectors," BOZ said.
Today the Kwacha was trading at 11.88 to the U.S dollar, down 15.2 percent this year.
Growth in Zambia's economy, underpinned by rising mining output, electricity generation, cement production and tourism, is expected to continue to expand in the third quarter of this year but BOZ said downside risks have risen and growth is lower than expected and more fragile.
These risks include the coming farming season, delayed implementation of fiscal cuts, high debt service, credit constraints due to high lending rates and high government borrowing.
BOZ forecast 2018 growth of about 4.0 percent, down from 4.1 percent in 2017.
"Decisions on the Policy Rate will continue to be guided by inflation forecasts and outcomes as well as progress in the execution of fiscal consolidation measures," BOZ said.
Zambia's fiscal deficit is estimated around 7.0 percent of gross domestic product this year, up from a budget target of 6.1 percent but down from 2017's 7.8 percent. Next year the deficit is expected to narrow further to 6.5 percent and BOZ called on strict adherence to the 2019 budget "to moderate the pressures on government financing, private sector liquidity challenges, debt distress, inflationary pressures, and threats to the stability of the financial sector."
