The Bank of Zambia (BOZ) says the Monitory Policy Committee (MPC) has decided to lower the policy rate by 225 basis points to 9.25%.
Speaking during the Monitory Policy Committee Meeting in Lusaka, Central Bank Governor Dr Denny Kalyalya said the decision was arrived at in order to mitigate the adverse effects of the COVID-19 on financial sector stability, economic activity and ultimately on people lives and livelihoods.
Dr Kalyalya added that the cut in the rate also complements the other broader set of measures that have already been announced by the bank of Zambia.
“The Monetary Policy at its May 18-19 2020 meeting decided to lower the Policy Rate by 225 basis points to 9.25 per cent. This is to mitigate the adverse impact of Covid-19 on financial sector stability, economic activity and ultimately on people lives and livelihoods,” The Governor said.
He also said among key factors the committee took into account to reach the conclusion, is the significant deterioration in economic activity with the economy projected to record the first contraction in 2020 since 1999 on the account of Covid-19 pandemic.
He, however, states that although the projected path for inflation is higher than the February 2020 MPC forecast, it is expected to trend towards the upper bound.
“Although the projected path for inflation is higher than the February 2020 MPC forecast, it is expected to trend towards the upper bound of the 6-8 medium team target range at the end of the forecast horizon” Dr Kalyalya explained.
Dr Kalyalya further said Zambia’s economy is projected to contract by 2.6 per cent in 2020 from a growth of 1.9 per cent in 2019 under the circumstances of Covid-19 pandemic.
The Central Bank governor noted that this is owing to the fact that the pandemic has worsened the already challenged domestic microeconomic environment.
“This is the first contraction in Gross Domestic Product in More than 20 years”, He said.
The Governor also noted that fiscal pressures are expected to heighten this year as revenue performance is adversely affected by the pandemic and spending to combat the unprecedented virus is rising.
He said revenue reduction is estimated at K14.8 billion as additional spending pressures related to external debt service exacerbated by the recent sharp depreciation of the Kwacha.
He further added that in this regard fiscal deficit this year is bound to exceed the 5.5 per cent budget target.
Dr Kalyalya noted that the Kwacha which had exhibited relative stability over the first two months of the year following the significant tightening of monetary policy in November and December in 2019 came under intense pressure in March.
“This reflected the unresolved macroeconomic challenges associated with the high debt service and debt levels rising fiscal defects as well as declining international reserves,’’ He explained.
The governor further said demand for government securities remained subdued largely due to tight liquidity conditions.
“The subscription rates for treasury bills and government bonds declined to an average of 84.0 % and 27.0 % from 91.0 % respectively. Dr Kalyalya explained.