Bank of Zambia yesterday rolled out a monetary policy framework to replace money-supply targeting, setting the inaugural benchmark interest rate at 9 percent, which analysts said signalled significant monetary tightening.
The rate will come into effect on April 2.
International analysts said the new benchmark represented monetary tightening, most notably because the central bank’s overnight lending facility – the rate it charges commercial banks as a lender of last resort – is due to be set at 250 basis points above the policy rate.
“This is a significant tightening,” said Razia Khan, head of Africa research at Standard Chartered in London. “From levels of around 6 percent previously, overnight rates should now fluctuate within a 7-11 percent band.”
The new rate, which has been in the pipeline for more than two years, should also add more transparency to what is already an attractive frontier market for international bond investors chasing after high yields.
Unlike its counterparts in East Africa, Zambia has managed to keep a lid on inflation in the last 12 months, due in part to the relative stability of its currency, the kwacha, against the dollar.
However, since populist opposition leader Michael Sata was elected president in September, the kwacha has weakened from around 5,000 to 5,300 amid concerns about more state pressure on foreign investors, particularly in the mining sector.
Bank of Zambia (BoZ) deputy governor Bwalya Ng’andu said the effect of kwacha weakness posed a risk to non-food inflation, although stable food prices in the rapidly expanding agricultural producer should moderate the overall picture.
“The bank has weighed the inflation risks and has determined that average inflation during the policy-related period would remain below 7 percent,” he told a news conference to announce the new rate.
Under Sata’s predecessor, Rupiah Banda, the central bank had made clear it wanted to introduce a benchmark interest rate, although Sata’s firing of BoZ governor Caleb Fundanga shortly after taking office had cast doubt on those plans.
One of Sata’s policy priorities has been to cut the cost of credit for Zambia’s businesses and its 13 million people in order to stimulate growth beyond the mining sector.
With the reforms, Zambia is marching in the footsteps of other frontier African states, most recently Uganda, which launched a benchmark rate and inflation target last July to tame inflation that had soared to a 17-year high of 16 percent.
The new policy took time to bed down, and inflation shot up to more than 30 percent in the final quarter of 2011 before a flood of foreign cash into high-yielding domestic debt reversed a slump in the shilling, cutting the cost of imports
[Reuters]
Levy, Magande, Fundanga and later RB & Musokotwane did a great job vis-a-vis our fiscal and monetary policy. As such, PF took over an economy in great shape with single digit inflation, stable kwacha and $2 bio in fx reserves. It’s my prayer that these PF lads won’t mess up a good thing but judging by their first 6 months in office, I’m very sceptical. Bwalya Ngandu is unqualified and failed miserably at DBZ so I’d rather he stopped issuing press statements on monetary policy and instead leave it to the Governor Dr Gondwe. As for fiscal policy, we haven’t heard or seen anything concrete from Cobra and Chikwanda to date!
Economic jargon I have a ka Temba and i don’t understand what basis points are, so i will just insult my Educated Lozi brothers. We educated you and now you want to split from us because an old man has promised you something better. That old man called the Litunga is going to Die soon then what.
**On another Note anyone know what happened to that woman that was sent to jail for perjury in the four Chon Cholii defilement Case. I’m only asking because if the Girls where lying then she was telling the truth and she should be freed. Then compensated for false imprisonment or is she too poor to get justice. Ba LT please investigate for us.
Or Lozi guys I’m only Joking no hard feelings guys we all love you. Just get a sensible leader and i will vote for him as Preso
Someone sensible like sata? Is the dispute about a lozi president? It seems monetary economics is above your station. You should not have bothered to post your out of topic nonsense.
# 2 Pa Zed
Bases point is simply a unit of measurement and 1% is equal to 100 bases points so 250 bases point is simply 2.5 %
I hope that blogger called RAS comes back today and read this articles, especially this line
…most notably because the central bank’s overnight lending facility – the rate it charges commercial banks as a lender of last resort – is due to be set at 250 basis points above the policy rate.
He got it from me first right here on LT blog. I hope this time it sticks in his heard because the free education KK gave him in grade 7 Social Studies and Grade 8 CIVICS seem not to have found room in the part of his brain responsible for long term storage.
Bootlicker am back. I did not dispute that the central bank is the lender of the last resort. What I was saying is that curretntly what is obtaining in the Zambian market is that commercial banks are lending to each other. There is no bank that is borrowing from the BOZ currently. Last resort means that the BOZ will lend out when commercial banks stop lending each other funds. There is no financial crisis in the Zambian market currently for BOZ to start lending to commercial banks.
GET THAT IN YOUR HEAD. I am being practical and not theoretical like you. I doubt if you are a practising economist with a focus on Zambia.
mate Bootliker, I m sure you meant “basis” and not “bases”
A good thing long overdue.Lets all start planning on how we are going to optimise this.Now its up to the banks to evaluate the risks and come up with their own rate atleasts slightly above this when they considers all the fundamental.Stanbic has done it at 11%,we expect others to follow suit though risk appetite differs with shareholders.
This is indeed good cos now the BOZ will greatly influence the cost of credit (thru OMOs) on the local market.The time for super profits will be a thing of the past especially if more players are allowed in the banking industry cos currently theses banks(especially foreign) tend to collude(Cartel) and set hey weird rates.
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9% not bad
@ Chief Bootlicker am back. I did not dispute that the central bank is the lender of the last resort. What I was saying is that curretntly what is obtaining in the Zambian market is that commercial banks are lending to each other. There is no bank that is borrowing from the BOZ currently. Last resort means that the BOZ will lend out when commercial banks stop lending each other funds. There is no financial crisis in the Zambian market currently for BOZ to start lending to commercial banks.
GET THAT IN YOUR HEAD. I am being practical and not theoretical like you. I doubt if you are a practising economist with a focus on Zambia.
RAS
Dude, I don’t know what you smoked that is still working even this early morning. So what is your point, and what is your contention, then?
Can you then what base rate or prime rate is all about and what bank of Zambia is trying to do. What is this 9% all about then?
This was my question to last time. If teh policy rate is of non-effect, why would BOZ bother. Besides, how is Uganda managing it. Is there Central bank modus operunda different from BOZ?
@ chief bootlicker. when it comes to economical issues, i find myself looking for your comment coz i have seen that you are usualy spot-on. thanks for educating us though i would love it if you were a bit soft on some bloggers. thanx
Bootlicker
From my understanding,this 9% is the rate at which BOZ want commercial banks to lend to each other.This time around,if commercial banks charge high rates to each other and this is passed on to the consumer through margins,the BOZ will increase money supply by buying securities on OMOs thus reducing the demand of money and hence the rates and vice-versa.The BOZ will not lend directly to commercial banks cos there is no credit crunch and if at all there is one,it case still perform credit(quatitative) easing.
The issue of last resort only comes in when banks start hoarding capital(money) and that is what RAS iam sure was disputing.Infact the rate at which BOZ will be lending to the commercial banks overnight(11.5%) is even more expensive than when they lend among themselves.
Just an interest, How does The Federal Reserve, and the Bank of England work when there’s no credit crisis?
When there is no crisis,one of the functions of the FED or Bank of England is to influnce the base rate(target rate in the US) thru Open Market Operations.When Interbank rates(base rate or target rate) are presumably high,this raises the cost of credit between banks and later on passed to the consumer.To solve this,The FED or BOE starts buying securities(OMOs) which expands or increase money supply on the market thus bring down money demand and thus base or target interest rates to desired levels by the FED or BOZ and eventually this is reflected on the commercial interest rate and vice versa .
@ Chief Bootlicker, the problem I have with you is that you try to regurgitate the theory in a text book to what BOZ is doing which is different.Your thinking is wrong. Practically what BOZ have done is to come up with a rate which is realistic to market movements. The BOZ will not lend anyone money at 9%. They want Banks to set 9% as their base rates instead of banks coming up with their own base rates. This is an indicative base rate. Currently banks are lending to each other at lower than that 9% (the interbark rates are oscillating and 5.5% to 6%). Your thinking that BOZ as the lender of last resort will lend at 9% is ignorance of the worst kind. THE 9% IS A BASE RATE FOR BANKS TO USE AND NOT THE LENDING RATE OF THE LENDER OF THE LAST RESORT TO BANKS. GET THAT???????
@ Sharpshooter, you are making sense!
Thanx, Chief Bootlicker and RAS for your debate very enlighting, this is the only we can get a meanful understanding of the happens in the Economical Sector of Zed than those insults we are exposed to on LT. Mind you BOZ is just a facilitator than a player of the Financial Markert, when it comes to the play of the inter Bank lending and Trading that we shouldn’t forget. But we must also a strict and tighter fiscal discpline for us to sustain the Credit Facilitate despite being risk averse to build and sustain this low interest rate base.Borrowers must have discipline to only borrow to grow their businesses than spent it on Luxury becaused of improved credit financing to enhance your/our Asset turnover.
Going by what happens in the developed world, borrowers are free to do with credit whatever they want. Whether for business or consumption. In fact, consumption drives drives business. Somebody got to buy your products. Consumer credit is a vital part of developed economies.
I thought Bootlicker was more intelligent than this. Is this the type of economists we has under CWEEEEEEEEEEEEE?
Wao: Boot Licker and RAS: nice exchange of comments; I understand the mechanism but because i am no economist, I love to learn a lot from what you guys are commenting. Great stuff!! to both of you. Just tone-down a bit; I think you are saying the same thing, except in a different way. Meaning, one is more practical while the other is more theoretical. The two angles you have taken complement. Thanks.
High political risk =high interest rates.
I was equally getting a bit misinformed about this 9% benchmark.Thanks RAS and Sharpshooter for the insight of course not forgeting Bootlicker.
It’s amazing that a very basic economic concept is debated like this. Either LT bloggers are not Economists, or our Zambian economists know nothing. One thing we lack in Zambian journalism is special interest journalists. A situation like this would not just be regurgitated but explained and unpacked by an Economic journalist. The same happens in other stories like health and science. Is there any wonder that 99% of news coverage in Zambia is politics?
RAS bootlicker and Sharpshooter kwena mwali sambilila… Thanks for expalining some of this jargon… i was getting excited that the 9% was a benchmark for us borrows. I thought the banks will reduce the lending rate to somewhere competitive amongst themselves as banks i.e. between 9% and 13%. Cheers guys please continue debating, I have a motion for you. How can we reduce the Exchange rate.
@RAS and @Bootlicker
Just a point of clarity from the two of you… If currently the Commercial banks lending rates to each other is somewhere in the range from 5.5% to 6% what economic sense is there for the BOZ to increase this rate to a standard 9%. Doesnt this shrink consumer surplus in that Commercial banks will make less profits from borrowing at 9% to each other and will then transfer this loss to consumers by means of a higher base rate?
Why not reduce commercial lending rates to 5% so that all commercial banks can charge their consumers a base interest rate of around 9%. and in the case of the BOZ being the lender of last resort they can set their repo rate at around 7% to discourage commercial banks from always running to the BOZ to borrow, or rather on a case by case basis
My last comment.
Economics, banking and accounting is not a preserve of the so called experts. It affects everyone. Lets blame the business journalists for wrong packaging of the reports. Lets not confuse each other here. If you are a person who uses money for your business or personnal use, better get some knowledge in economics, banking and accounting, It’s quite handy..
The debate is healthy and educative. I hope as a people we could spend more time on these issues. It would be nice to have a program for our MPs on such matters so that they can srutinize these policies to ensure they are benefiting the people on the street. Then the question is how will this turn into more money in the pockets of us common men on the street. Which govt policies or programs will utilize this policy change. If these issues are not addressed it will be a good policy to have but with no benefit to the common man. MPs should be educated on these matters, economists help our MPs understand simple economics.
Frontier African states…kinda makes one feel warm and fuzzy. Nothing to add. Just can’t resist passing by a rare peaceful spot :) Um actually just one comment… I remain positive that Zed is improving and behind all the smoke and mirrors of politics there remains the potential to continually improve. A lot of work still to be done on mindset and the translation of information across the board. So economics aside it is possible to explain even the basics without a smirk… There are many Zambians who do turn up at work and do their jobs and we forget to commend them for this stabilising truth :)
@RAS 14 …you are spot on!!!
Sad day for mother Zambia. Ukwanomics at play. When real year on year inflation is hovering arroung 17%, policy direction of PF uncertain, Political atmosphere poisoned and the Human resorce manage called dr. Ngandu tries to implement what americans and pritish are doing.- that calls for worry on the banking community and they will not manage to hedge the risks even if the pegeg risk premium at double what the BOZ is fixing. The net effect will be banks investing in risk free government bonds which will result in cash squeeze in the productive sector
The best the PF would have done before doing cut and paste of MMD monetary policy was to create stability, assure investor confidence, monitor the inflationary pressures arrising from uncertainities brought about by regime change and calm the markets. This calls for consistence in policy not the wafles we have been seeing where these rifraff kaponya ministers are just yapping out of tune on almost all key fundamental policy decisions
Ras,
you are very close to the very idea why this is being done.
In business we have what we call the cost of equity and this relates to risk free return rates. What BOZ has done is to stabilise this tool in business by normalising the risks involved to businesses,as in unifrom cost of capital. The base rate introduced by BOZ is the cost of capital or liquidity for banks and is going to be guiding rate for banks in setting their lending rates to you and me,which could be 200 bases points above BOZ base rate. Another dimension to this is for international money markets to look at Returns in Zambia. In short the money markets is being managed in a way that will be inline with gov. policy unlike the past where rates are set against diverse sources of funds for banks.
Boss can you just say everything you said in English…
People, please help. How does The Federal Reserve, and the Bank of England work when there’s no credit crisis? Surely they are not only there as Lender of Last Resort, are they. Are they always lending miney to commercial banks?
#15 Muzo, Going by what happens in the developed world, borrowers are free to do with credit whatever they want. Whether for business or consumption. In fact, consumption drives business. Somebody got to buy your products. Consumer credit is a vital part of developed economies. That’s why we have mortgages, car loans, and credit for household goods like fridges, cookers, vacuum cleaners and retails cards that you use to buy clothes etc. If course people must use credit responsibly and credit providers by law are supposed to provide all necessary information and warnings of what will happen if you fail to pay credit when it is due. In short, without consumer credit, economies struggle to grow.
#31, ICE Road Trucker. Kindly answer me if Zed has a middle Class? The Answer is no, that is why our Friends in Europe/developed world borrow because their earning can support Credit Facilitates and necessitate eased pay back without drastically affecting their Household economy in short, they have surplus buying power to help defer/repayment which can support indebtness. I have seen it, that even SME in ZED borrow for Luxurious test for economic status in the name of Business later their businesses are rendered bankrupt. That was my point! Almost everyone in First World live on borrowing but their income/earnings can support that. How many Zedians earn Net of K10m? To support living on credit with prompt repayment without bailliffs bouncing at your door for repos!!
31(Ice_Road_Trucker)
As RAS put it,Central banks do not lend money to banks when there is no crisis but make sure banks lend to each other at desired rates reflective of market conditions.How is this done?one of the functions of the FED or Bank of England is to influence the base rate(target rate in the US) thru Open Market Operations.When Interbank rates(base rate or target rate) are presumably high,this raises the cost of credit between banks and later on passed to the consumer.To solve this,The FED or BOE starts buying securities(OMOs) which expands or increase money supply on the market thus bringing down money demand and thus base or target interest rates to desired levels by the FED or BOZ and eventually this is reflected on the commercial interest rate and vice versa.
33
should be BOE not BOZ but same context anyway.
This
However, since populist opposition leader Michael Sata was elected president in September, the kwacha has weakened from around 5,000 to 5,300 amid concerns about more state pressure on foreign investors, particularly in the mining sector.
is an insult
#2 Pa Zed,
I agree with u over these BOZ fellows being too technical. Can you came down to earth when you are making public announcement Mr Bank Governor. You are addressing lay people not technocrats. Your “base points, etc” is surely meaning less. Come on guys!!! We want to see reality not hear theories!
I think some of these guys on the blog are only telling half the story. Central Banks are there to regulate the business cycle, they are not necessarily there to lower interest but to regulate the financial sector, business cycle and control inflation rate. The article has explained everything that you need to know. For example, Uganda introduced these rates to fight inflation, that is clearly explained in the article.
To regulate the Business cycle and inflation, Central Banks are likely to use the Taylor rule, i.e if Inflation is higher than the target, raise interest rates to combat it, also if we are not at the full level of employment, lower interest rates to increase employment levels.
Let us not complicate a very simple issue. Everything has been explained in the article.
@MMD-chief bootliker:
You could be just as effective make your point without being so condescending to others. You points tend to be ignored, lost and taken for “what is new here?” because of the way you interact with others on here! Seeing things differently from your view point does not make others stup!dy or damn!
@RAS, @Sharp shooter, @Mr. Capitalist:
Thanks for your insights. Some of us who have spent our entire lives in engineering fields appreciate your contributions to make some of these topics that sound like “Greek” to a lot of us understandable. Now I know what Base fimo fimo means!!!!
economics is an art, the problems will Zambians is they want to be glued to economic theories that don’t work, or later on disadvantage the middle income group. be assured if lending rate is controlled, alot of middle income group will be able to access loans and grow their businesses which in the end is good for the economy. countries that have developed had to target the middle income brackets. to hell with economic theories which don’t work !!