(Bloomberg) -- Wednesday’s Bank of Zambia interest-rate increase has barely slowed the kwacha’s slide, with the currency sinking to a fresh record low against the dollar.
The kwacha extended its losing streak to 16 consecutive sessions, trading at 27.4604 per dollar by 1 p.m. in London. That’s despite the central bank’s 50 basis-point rate hike to 14%, a move partly aimed at stabilizing the currency.
The dollar has rallied since Donald Trump won the US presidential election as investors expect his economic polices to boost the greenback. That’s spurred broad weakness across emerging-market currencies, with the kwacha under additional strain from the worst drought in over a century.
“Broader dollar strength after the US elections is exposing the kwacha’s structural vulnerabilities, as Zambia continues to suffer from a terrible drought that is increasing its import bill, depleting foreign reserves, and reducing export revenues,” said Danny Greeff, co-head of Africa strategy at ETM Analytics.
While International Monetary Funds anticipated at year-end may bring some short-term relief, Greeff said that “ultimately the kwacha remains vulnerable to further weakness in the coming quarters.”
Zambia’s central bank governor said that the strengthening dollar could strain the nation’s economy further, adding to urgency in lessening dependence on the US currency.
The drought has forced Zambia to expand imports of food and power, accelerating the drain on foreign reserves. Annual inflation has climbed to 15.7%, a near three-year high, fueling the kwacha’s decline.
The Bank of Zambia’s move this week was “a signal to the market that the bank is aware of the inflation risks and will keep pursuing orthodox policies,” said Gergely Urmossy, a frontier markets strategist at Societe Generale in London. However, a half-percentage-point increase “won’t make much of a difference strictly from a fundamental standpoint,” he said.
--With assistance from Paul Richardson and Matthew Hill.
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