Zambia Central Bank Raises Overnight Rate, Move Seen Aimed at Propping Kwacha

Zambia’s central bank said it was increasing its overnight lending rate for commercial banks to 10 percentage points.  This is above the benchmark policy rate from 6 percentage points, in what traders said was another bid to prop up the ailing local unit.  In a circular to banks seen by Reuters on Monday, the Bank of Zambia also said it would now subject government local and foreign currency deposits to statutory reserve requirements, currently at 14 per cent.

“The additional tightening demonstrates the absolute commitment of the Zambian authorities to fight exaggerated kwacha weakness,” said Razia Khan, head of Africa research at Standard Chartered Bank.  Khan then pointed out, “If they can do this, perhaps they might look at other measures too. So anyone who is long dollar in this environment, in anticipation of further kwacha weakness, will have to consider this.”

The kwacha jumped nearly 4 per cent to 6.5500/6500 against the dollar on Monday, pulling away from recent all time lows mainly caused by the weak price of copper, of which Zambia is Africa’s second largest producer.  The currency is still down 18 percent so far this year, but traders said the latest measures from the central bank would provide a boost by tighten market liquidity.

A commercial bank trader stated, “The adjustment of the overnight lending facility rate …  means the cost of funding from the central bank as lender of the last resort will go up. This should ultimately support the kwacha.”  The kwacha weakened nearly 3 per cent last Thursday on rumors that President Michael Sata, 76, was unwell. Sata denied any illness and accused the opposition of fuelling the speculation about his health.

Source: CNBC Africa