Zambia's central bank cut its policy rate for the second time in a row, saying inflation is forecast to remain within the bank's target range over the medium term and prospects for economic growth are expected to improve despite subdued economic activity in the first quarter.
The Bank of Zambia (BOZ) again cut its policy rate by 150 basis points to 12.5 percent for cuts totaling 300 basis points this year following a similar cut in February.
The cut in February was the first lowering of rates since the policy rate was introduced in March 2012, when the bank moved away from targeting money supply. It was also the first change in rates since November 2015 when a tightening cycle came to an end.
As in February, the BOZ also lowered the statutory reserve ratio by 300 basis points, cutting the rate to 12.50 percent. This brings this year's cut in the ratio to 600 points.
In addition, the central bank narrowed its policy rate corridor to plus/minus 1 percentage point from plus/minus 2 percentage points to "improve the clarity of the policy stance and enhance the effectiveness of the monetary policy framework."
The central bank signaled it remains ready to lower rates further, saying it will be guided by inflation and further progress in fiscal consolidation and "stands ready to take appropriate monetary policy measures to support price and financial system stability that supports the diversification and growth of the economy."
Although the prospects for economic growth are expected to improve, with the country's growth seen at 3.9 percent in 2017 and 4.6 percent in 2018, the BOZ is concerned over high lending rates that continue to constrain access to credit and thus hold back economic activity.
This forecast is unchanged from February. Last year Zambia's economy grew by an estimated 3.0 percent and credit to the private sector shrank by a further 3.2 percent in the first quarter from the fourth quarter.
The rate cut is likely to have surprised many economists, who expected the BOZ to hold fire until the impact of a jump in regulated electricity prices on inflation becomes clear. The cost of residential electricity is scheduled to rise 75 percent this year as the government scraps subsidies.
An initial 50 percent rise in electricity prices took effect this week and the remaining price rise will take effect on Sept. 1.
But the BOZ said its forecast for inflation take into account the rise in electricity tariffs and risks are currently favoring low and stable inflation. This is helped by a bumper maize harvest, fiscal measures, a recovery in global growth and commodity prices that should help exports, and the relative stable exchange rate of the kwacha.
The central bank expects inflation to be consistent with its 2017 target of 9.0 percent and within the medium-term target range of 6-8 percent by early 2019.
Zambia's inflation rate was steady at 6.7 percent in April and March but sharply down from a record high of 22.9 in February 2016.
"The deceleration in inflation was largely due to the pass-through from the continued appreciation of the kwacha against the U.S. dollar, the reduction in retail fuel prices in January 2017 and the seasonal increase in the supply of some food items," the BOZ said.
After tumbling 42 percent against the dollar in 2015 and hitting a record low 13.9 record low November 2015, the kwacha has been firming steadily.
Today the kwacha was trading at 9.22 to the dollar, up 8 percent this year.
