Zambia Raises Key Rate to Record to Contain Surge in Prices

Zambia’s central bank raised its benchmark interest rate for a second meeting to a record high to stem a slide in the currency and tame inflation.

The Monetary Policy Committee increased the key lending rate to 12 percent from 10.25 percent, the Lusaka-based central bank said in an e-mailed statement today. Last month the MPC increased the rate by half a percentage point.

“It’s certainly a big increase” that will probably arrest the kwacha’s fall in the near term, Shilan Shah, an economist at Capital Economics in London, said by phone. “You might see a bit of a rally in response.”

Zambian consumer prices are rising after the government curbed subsidies on corn and fuel last year, while a weakening currency has made imports more costly. The kwacha has declined 11 percent against the dollar this year, ranking it as the worst performer in Africa after Ghana’s cedi.

“Risks to inflation are generally on the upside,” the Bank of Zambia said today. “It is expected that the pass-through effects from the depreciation of the exchange rate will impact on inflation.”

Slower Growth

The rate increase may lead to slower growth in the economy, Shah said. It will probably only support the kwacha in the short term, because the government’s fiscal policy “remains far too loose” and will continue to undermine the currency, Shah said.

Slower growth in China will also impact the economy of Africa’s second-biggest copper producer and put pressure on the kwacha, Shah said. The government and the central bank have been taking measures to try stem the slide in the currency as the country meets investors in the U.S. and London to sell its second Eurobond.

Finance Minister Alexander Chikwanda a week ago scrapped two laws restricting trade in foreign currency in a bid to support the kwacha. Inflation quickened for the fifth straight month to 7.7 percent in March, the highest since November 2011, the Lusaka-based Central Statistical Office said yesterday.

Before it's here, it's on the Bloomberg Terminal.