Zambia Raises Benchmark Interest Rate to 15.5% From 12.5%

The Bank of Zambia raised its benchmark lending rate by a record 3 percentage points to rein in inflation after the currency of Africa’s second-biggest copper producer lost almost half its value this year.

The central bank increased the policy rate to 15.5 percent from 12.5 percent, Governor Denny Kalyalya told reporters in Lusaka, the capital, on Tuesday. The median estimate of three economists surveyed by Bloomberg was 14 percent.

“We want to promote growth but, for now, inflation for us is a bigger evil going forward,’’ Kalyalya said in an interview after the announcement.

The inflation rate almost doubled to 14.3 percent in October, triggered by power shortages and the kwacha’s 49 percent plunge against the dollar this year, the most of 155 currencies tracked by Bloomberg. That’s forced the Bank of Zambia to act even as economic growth slows because of drought and falling copper revenue. Barclays Plc is forecasting expansion of 3.4 percent this year, which would be the slowest pace in 17 years.

“They certainly had a very difficult decision; there was no easy answer,” John Ashbourne, Africa economist at Capital Economics in London, said in reply to e-mailed questions. “Hiking rates so sharply will put even more pressure on the economy. Growth was already slowing significantly, and this will just make it worse.”

The kwacha gained as much as 1.9 percent against the dollar to 12.3461 after the rate decision. The currency was 0.3 percent higher at 12.5422 as of 2:20 p.m. in Lusaka on Tuesday. Yields on the $1.25 billion of Eurobonds due July 2027 fell 17 basis points to 11.18 percent.

Boosting Credibility

The bank also removed limits on interest rates commercial lenders can charge. The caps were introduced by Kalyalya’s predecessor, Michael Gondwe, in 2012.

Kalyalya said monetary policy tightening was needed to anchor price expectations and bring inflation back below 10 percent. The bank is ready to take “appropriate” action to support economic stability, he said, keeping the door open on more rate increases.

The central bank last raised the benchmark rate 12 months ago by 50 basis points. It will hold its next rate meeting in February.

The Bank of Zambia’s aggressive move may have been aimed at improving its credibility after failing to act in the past year, said Irmgard Erasmus, an analyst at NKC Independent Economists in Paarl, near Cape Town.

“We view the hawkish stance as a signal that the monetary regulator will prioritize price stability despite growth challenges, and has set a credible precedent that shocks to the monetary environment will be dealt with,” he said in an e-mailed note to clients.

Kalyalya said Zambia could benefit from aid from the International Monetary Fund, echoing Finance Minister Alexander Chikwanda’s softening in stance toward external support. Authorities have so far resisted turning to the IMF for emergency loans, selling Eurobonds instead this year to raise funding for the budget.

“Clearly, with commodity prices having collapsed, that might be useful to get balance of payments support,” the governor said. “I don’t think we need the IMF per se to have austerity, it’s up to us as a people.”


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