Rising Rates Prompt Zambia to Ease Kwacha Support Measures

Zambia’s central bank will gradually ease measures put in place to stem a sliding currency as yields on government debt rose to a record high and interbank lending rates jumped.

Efforts to support the kwacha, which gained 14 percent since dropping to a record low on May 28, led to a “sharp rise” in lending rates, Governor Michael Gondwe said today in an e-mailed statement. The rate at which banks lend to each other topped 25 percent this month and yields on 364-day Treasury bills rose 295 basis points to 22.95 percent.

“Measures we have taken to restore stability in the financial sector are temporary,” Gondwe said. They “will be scaled back when it gets more evident that the threats to higher inflation have receded,” he said.

The Bank of Zambia in May raised its overnight lending rate and subjected offshore accounts to a higher statutory reserve ratio to support the kwacha that had retreated more than 20 percent in 2014. Inflation accelerated to 7.9 percent in June, the highest since November 2011. The currency of Africa’s second-biggest copper producer gained 0.1 percent to 6.1350 per dollar by 6:06 p.m. in Lusaka, the capital.

The central bank increased the maximum amount lenders can charge for credit to 28 percent from 21 percent on June 17 as the efforts bolster the kwacha made funding more expensive.

The Zambia Chamber of Commerce and Industry, the Lusaka-based business lobby group, last month called on the central bank to reverse its liquidity tightening measures. Gondwe said government borrowing to fund infrastructure development also caused higher lending rates.

As inflation and the kwacha stabilize, “we will see lending conditions return to less stressful levels which support growth,” he said.

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