Zambia's central bank cut its policy rate for the fourth consecutive time this year, though at a slower pace than in the past, as inflation continues to decline and is expected to remain within the bank's target range over the next two years.
The Bank of Zambia (BOZ) cut its policy rate by 75 basis points to 10.25 percent, half the size of the earlier cuts of 150 basis points, and has now cut the rate by 525 points this year following cuts in February, May and August.
The BOZ also continued its policy of lowering the statutory reserve ratio along with cutting the policy rate and cut the ratio by 150 basis points to 8.0 percent. Previously the ratio was cut by 300 basis points in February, May and August so it has been cut by 10.50 percentage points this year.
"Changes in the policy rate will continue to be guided by inflation outcomes and forecasts as well as progress in fiscal consolidation," the central bank said, adding it stands ready to implement appropriate measures to maintain price and financial system stability and support economic diversification and growth.
The outlook for Zambia's economy has improved in recent months with good rainfall and rising copper prices. The BOZ's tight monetary policy since late 2015 has managed to push down inflation from almost 13 percent in February 2016 to 6.4 percent in October as the exchange rate of the kwacha has stabilized following a 42 percent plunge in 2015.
But the fiscal deficit remains high and public debt has been rising at what the International Monetary Fund has described as "an unsustainable pace," crowding out lending to the private sector and increased the economy's vulnerability.
"Containing the budget deficit and the overall debt, including domestic arrears, to sustainable levels remain critical to consolidating macroeconomic stability," the BOZ said, adding that the deficit on a cash basis was in line with the 2017 budget target of 7.0 percent for the year to September.
The BOZ forecast that inflation is projected to trend towards the lower bound of its 6-8 percent target range over the next 8 quarters, with excess supply of maize, relatively stability of the exchange rate and a recovery in commodity prices, especially for copper, supporting low inflation.
Following the BOZ's rate cut in August the overnight interbank rate eased to 10.4 percent at the end of September from 12.2 percent end-June, within the policy rate corridor of 10-12 percent.
After the kwacha tumbled in 2015 on low copper prices, government revenue and a poor harvest from drought, the kwacha bounced back in 2016 and rose by 10 percent as the BOZ tightened its monetary policy in November 2015 and maintained a tight stance until February this year.
Today the kwacha was trading at 10.12 to the U.S. dollar, down 1.6 percent this year, supported by improved supply of foreign exchange from the mining sector and non-resident investment in Government securities, BOZ said.
The prospects for Zambia's economy is improving with businesses expecting higher investment over the next 12 months as the mining and manufacturing output, along with agriculture, expands while a recovery in electricity generation should support higher production.
The BOZ projected growth for 2017 and 2018 or 4.2 percent and 5.0 percent, respectively, following growth of 3.8 percent last year.
In August the central bank forecast 2017 growth of 4.3 percent and 2018 growth of 5.1 percent.
The IMF has forecast growth this year of 4.0 percent, rising to 4.5 percent in 2018 and 2019. Inflation is seen averaging 6.8 percent this year and 7.4 percent next year, down from 17.9 percent in 2016.
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