Zambia’s Central Bank Hikes Interest Rate to 14% to Curb Inflation
TLDR
- Zambia's central bank raised key interest rate to 14% to combat persistent inflation and stabilize the weakening kwacha.
- Governor Denny Kalyalya announced a half-point hike to bring inflation back to the target band of 6%-8% and mitigate currency depreciation effects.
- Inflation above target since 2019; forecasts predict 15% for 2024 and 13.9% for 2025 due to factors like drought-induced food shortages and low water levels affecting hydroelectric power in Zambia.
Zambia’s central bank raised its key interest rate to 14%, the highest level since 2017, to tackle persistent inflation and stabilize the weakening kwacha.
The half-point hike, announced by Governor Denny Kalyalya, aims to steer inflation back to the target band of 6%-8% and ease pressures from currency depreciation, which has worsened inflation. Annual inflation in Zambia has remained above target since 2019 and is expected to average around 15% in 2024, with forecasts raised to 13.9% for 2025.
The kwacha has lost nearly 3% since late October, driven by increased foreign exchange demand amid drought-induced food shortages and rising fuel needs due to electricity shortfalls. Zambia relies heavily on hydroelectric power, which has been impacted by low water levels.
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Key Takeaways
The central bank’s rate hike reflects growing pressure on Zambia’s economy, strained by inflation and currency depreciation amid a severe drought. With inflation at multi-year highs, Zambia’s central bank has taken a proactive stance to prevent further currency decline and inflationary pressure, while remaining prepared to adjust policy further if necessary. The IMF, citing high inflation risks and loose liquidity conditions, supports a flexible exchange rate to counter ongoing economic challenges. The drought’s impact on agriculture and hydroelectric power has also cut Zambia’s growth prospects, with the IMF recently lowering the 2024 growth forecast to 1.2%, the lowest since the pandemic-driven contraction in 2020.
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