THE Bank of Zambia has maintained the policy rate at 12.5 percent to balance against external and domestic risks of inflation, says Bank of Zambia Governor Denny Kalyalya.
Dr Kalyalya said yesterday this was also done to take care of a sharper decline in economic output than earlier anticipated.
Giving a report of the Monetary Policy Committee (MPC) for the third quarter of 2015, Dr Kalyalya said the body came up with the decision not to change the policy rate after considering that the third quarter annual inflation rate was projected to be slightly above the end of the year target of 7.0percent.
He said the emerging risks to the real economy arising from power rationing were expected to adversely impact economic growth.
Dr. Kalyalya observed that the liquidity conditions had continued to be tight following the increase in statutory reserve ratio to 18 percent from 14 percent.
He said that the committee was of the view that maintaining the policy rate, along with open market operations, will continue to help contain inflationary pressures.
“The MPC decided to leave the policy rate unchanged at 12.5 percent. In arriving at this decision, the committee took into account the external and domestic developments discussed above. The MPC also took into account that the third quarter of 2015 is annual inflation is projected to be slightly above the end year target of 7.0percent.
“However, emerging risks to the real economy arising from power rationing are expected to adversely impact economic growth. In this regard, external and domestic risks to inflation must be balanced against the risks of a sharper decline in economic output than earlier anticipated, given emerging challenges in the energy sector,” Dr. Kalyalya said.
He said fiscal consolidation will help to achieve stability and lower Government security yield rates by addressing revenue shortfalls and rationalising expenditures.
He observed that the move was critical to achieving a stable macroeconomic environment which was essential for lower interest rates that supported economic growth.
And Dr. Kalyalya said the MPC raised the statutory reserve ratio from 14 percent to 18 percent effective April 8 in order to address the increased depreciation and volatility in the exchange rate which was likely to feed into higher inflation.
He also explained that as a result of the tightened liquid conditions, the Interbank rate remained slightly above the upper bound of the policy rate corridor of 14.5 percent for most of the quarter.
“Further tightening of liquidity conditions through the increase in the statutory reserve ratio led commercial banks to rely on the Interbank market and the overnight lending facility to manage their short term liquidity needs. Consequently, the Interbank rate rose to 14.6 percvent at the end of June from 12.9 percent in March.”
Food and non-food inflation declined to 7.1% and 7.0% in June 2015 from 7.2% and 7.1% in March 2015, respectively.