(Bloomberg) -- Zambia’s central bank raised its key interest rate to the highest level since 2017 to contain price pressures and prop up its bruised currency.
The monetary policy committee lifted the rate to 14% from 13.5%, Governor Denny Kalyalya told reporters in the capital, Lusaka, on Wednesday.
“The decision to raise the policy rate is aimed at steering inflation back towards the target band and anchoring inflation expectations,” he said, adding “we took account of what was happening in the foreign exchange market.” Annual inflation has been above the central bank’s 6%-8% target since May 2019.
The kwacha has shed almost 3% of its value since Oct. 24, fanning inflation that’s already near a three-year high of 15.7% because of a severe drought.
The dry spell has led to a low supply of corn, fish and vegetables, and increased demand for fuel to make up for electricity shortages, Kalyalya said. Zambia gets most of its power from hydroelectricity, which has been badly hurt by low water levels.
The governor attributed the latest currency weakness to increasing demand for foreign exchange. After falling to $7.4 million at end-September, it’s risen to $52.7 million as at Nov. 4, Kalyalya said.
Annual inflation is now forecast to average around 15% in 2024, but the MPC raised its outer year forecasts and projects inflation at 13.9% in 2025 compared with 12.7% reported in August.
‘Stands Ready’
“The bank stands ready to take appropriate action should inflation persist above the 6%-8% target band,” the governor said. “Decisions on the policy rate will continue to be guided by inflation outcomes, forecasts and identified risks, including those associated with financial stability.”
The rate move comes a day after the International Monetary Fund said “monetary policy must remain agile to combat inflation while preserving exchange rate flexibility.” It also urged the central bank to drive inflation toward the target band amid “a negative real policy rate, looser liquidity conditions, and strong growth in monetary aggregates.”
The dry spell has also crimped economic growth.
The IMF last month trimmed its 2024 growth projections for the southern African nation to 1.2% from 2.3%. That would be the economy’s slowest expansion in 25 years barring, the contraction in 2020 at the height of the pandemic.
(Updates with demand for foreign exchange in paragraph six. An earlier version of the story corrected the month in which inflation was last above target in third paragraph.)
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