Zambia's central bank cut its policy rate by 150 basis points, the reserve ratio by 250 points and the overnight lending facility rate by 400 points citing a sharp fall in inflation, continued appreciation of the kwacha's exchange rate and improving economic prospects.
It is the first cut in rates by the Bank of Zambia since since the current policy rate was introduced in March 2012 when the bank moved away from targeting money supply. It is also the first change in rates since November 2015 when the tightening cycle came to an end.
Today's rate cut brought the policy rate down to 14.00 percent from 15.50 percent, the overnight lending facility rate was narrowed to 600 basis points above the policy rate from 1,000 points, and the statutory reserve ratio was lowered to 15.50 percent from 18.0 percent.
"The Bank of Zambia will closely monitor domestic and external developments and stands ready to take appropriate monetary policy measures on price and financial system stability that support the diversification and growth of the economy," the central bank said.
Zambia's inflation rate fell to 7.0 percent in January from 7.5 percent in December and down from 22.9 percent in February 2016, reflecting dissipation of base effects, the rise in the Kwacha and a deceleration in both food and non-food inflation.
The central bank expects inflation to remain within its 2017 target range of 6-8 percent in the medium term, with risks favoring low and stable inflation from expected normal to above normal rainfall, fiscal consolidation and a projected improvement in global economic growth.
Zambia's is Africa's second-largest copper producer and its economy has suffered from the fall in global commodity prices, strained public finances, electricity shortages, subdued consumption and low investment.
But the central bank said economic growth prospects are now improving, with Gross Domestic Product seen rising by 3.9 percent and 4,6 percent this year and 2018, respectively. Growth is underpinned by an improving agricultural sector, due to better weather, increased energy supply and minerals production.
The government's 2017 budget was approved in December with the aim of reducing the budget deficit to 7.0 percent of GDP and the central bank said an effective implementation would present a good base for rebalancing fiscal and monetary policies.
The external sector is also expected to improve this year due to a recovery in export prices, a stable exchange rate and higher foreign reserves, which ended last year at US$2.4 billion, the equivalent of 3.3 months imports.
