Bank of Zambia ponders loosening forex market interventions

The Bank of Zambia Governor has attributed the rise in interest rates to increased domestic borrowing by government to finance infrastructure projects. The central bank is happy with the impact of its measures on the stabilisation of the kwacha and hopes to loosen its interventions as the kwacha gains more firm ground.

Below is the full statement.
 

GOVERNOR’S STATEMENT ON RECENT DEVELOPMENTS IN THE FINANCIAL SECTOR

The Bank of Zambia wishes to update the general public on recent developments in the financial sector, following the measures we announced at the end of May to address the instability in the foreign exchange market. Over the past six weeks, we have seen some stability return to the financial sector as a direct result of the measures we took to ensure that we are able to contain inflation and stabilize the foreign exchange market. In this regard, over the past six weeks we have seen the Kwacha appreciate to its current levels of around K6.1 per US Dollar, from over K7 per US Dollar at the most extreme point of its depreciation.

In our statement of June 10, 2014, we had also indicated that in our view the economy was fundamentally sound and this remains true today. In this regard, it was our view that the measures we have taken to restore stability in the financial sector are temporary and will be scaled back when it gets more evident that the threats to higher inflation have receded. This will be done in a measured way to ensure that we do not see a return to instability in the financial markets that we witnessed earlier in the year. In this regard, the Monetary Policy Committee (MPC) will be meeting in early August, and we will be assessing the threats to inflation, as well as reviewing a wider set of factors not only including developments in the money and foreign exchange markets, but also developments in the broader economy. The decisions of the MPC will be communicated to the public as is now customary under the new monetary policy framework.

Notwithstanding the positive response in the foreign exchange market and the beneficial impact we anticipate this will have on inflationary pressures over the medium term, one of the consequences of the tightening of monetary policy has been a sharp rise in the interbank interest rates. The interbank interest rate is the rate at which the commercial banks lend money to each other. In this regard, with the stability we are now seeing the Bank of Zambia has begun to ease liquidity conditions by providing liquidity to the banking system through Open Market Operations (OMO).

The Bank of Zambia is mindful of the importance of ensuring that the macroeconomic stability that has been achieved of high growth, single digit inflation, strengthening external sector and financial system stability is maintained. In the area of growth, we continue to support the efforts of the financial sector to extend the provision of financial services to the private sector, particularly the small scale enterprises, so that they are able to make a meaningful contribution to growth.

We note that, in the short term, interest rates have risen reflecting not only the recent tightening in monetary policy, but more fundamentally the higher Government borrowing necessitated by strong infrastructure investment. This investment is critical in order to ensure that our economic growth is sustained and that it leads to greater employment, the reduction of poverty and inequality. We are confident that as we anchor stability in terms of low inflation and stability in the foreign exchange market, we will see lending conditions return to less stressful levels – which support growth and macroeconomic stability.

Issued by:

 

Assistant Director – Communications

Bank of Zambia

Box 30080

LUSAKA 

Email: pr@boz.zm

 

July 15, 2014

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