Zambia – Further To Run In Easing Cycle


Thursday, July 06, 2017 2:35 PM/BMI Research

BMI View: Relatively low inflation and a weak domestic economy will lead the Central Bank of Zambia to make further interest rate reductions in 2017 and 2018. We anticipate an additional 100bps of cuts in 2017 and 150bps worth of reductions in 2018, which will be aimed at alleviating stresses in the banking sector as well as stimulating credit demand.

We expect the Bank of Zambia (BoZ) to remain in easing mode for the remainder of 2017 and 2018, following the 300 basis points worth of cuts already made thus far in 2017.

Inflation looks poised to remain within the BoZ's target band of 6.0-8.0% over the next 18 months, giving the authorities leeway to cut rates further to boost credit growth and stimulate the faltering domestic economy.

Moreover, while we have long anticipated easing, with signals that the bank is adopting an even more dovish than anticipated monetary policy after a 150bps reduction on May 17, we have revised our forecasts.

We now anticipate an additional 100bps worth of cuts in 2017 and 150bps worth of reductions in 2018, taking the rate to 11.50% and 10.00% at the end of 2017 and 2018 respectively.

Good Harvest And Stable Currency Will Anchor Inflation

The disinflationary trend of the last 15 months, which has seen price growth fall from 22.9% y-o-y in February 2016 to 6.7% in April 2017, is likely at an end.

However, we expect inflation to remain relatively stable around its current levels – and within the central bank's target band – for the next 18 months.

Strong harvests will help to keep a lid on the price of food, which makes up 53.5% of the consumer price basket.

At the same time, rising copper production and stable prices will ensure relative currency stability and muted imported inflationary pressure.

We are expecting inflation to average 7.1% in 2017 and 7.0% in 2018, from 18.9% in 2016.

Slow Economic Growth And Banking Sector Weakness Will Prompt Further Cuts

This inflationary outlook will give the central bank the room to further ease monetary policy in a bid to support credit growth and economic activity. We are forecasting real GDP growth of 4.7% in 2017 and 4.9% in 2018.

Although these rates of expansion represent a recovery relative to the estimated 3.0% achieved in 2016, they are well below the average growth rate of 7.5% in the 2005-2014 period.

Furthermore, the recovery will be driven by growing copper exports rather than strength in the domestic economy, which is struggling.

Private sector credit has contracted in year-on-year terms, as has real retail sales growth, while non-performing loans increased to 10.6% of the total in March, up from 10.0% in December.

Further rate reductions will help to boost demand for credit and will also ease the pressure on existing borrowers who are struggling to repay debts.

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