Stanbic Bank has forecast a rise in the Zambia’s annual rate of inflation by December 2017.
In a note to investors, the bank said Zambia’s rate of inflation reached 7 percent year on year in January 2017 from 7.5 percent year on year in line with its expectations.
It said inflation, which may print slightly lower in February is close to bottoming out before rising to 9.8% year on year by December 17.
“We expect inflation to average 8.3% year on year in 2017 from 19.6% year on year in 2016. Pressure on headline inflation in the second half of 2015 and the first half of 2016, pushing it to a peak of 22.2% year on year stemmed mainly from food inflation. But food inflation has reversed course since peaking at 26.6% year on year,” said Samantha Singh, the bank’s research analyst.
“With the Zambian Meteorological Department anticipating normal to above normal rainfall across the country in Q1:17, food supply is likely to remain strong, thus restraining food price pressures. The one upside risk to inflation in 2017 will emanate from the reduction of subsidies by the government, a recommendation that will most likely be further entrenched under the mooted IMF programme.”
Ms. Singh said the bank expects that the Bank of Zambia (BOZ) will start easing its monetary policy stance at its next meeting in February.
The BOZ maintained a tight monetary policy stance throughout 2016, leaving the policy rate unchanged at 15.5%.
“We see the BOZ reducing the policy rate (BOZ rate) to 12.0% by the end of 2017. Despite retaining the policy rate at 15.5% at the MPC Nov, the BOZ removed restrictions to its overnight lending facilities (OLF). Banks were previously limited to access the facility once a week. Banks can also now roll over intra-day credit into overnight loans,” she said.
“In addition, banks’ compliance with statutory reserves requirements reverted to a weekly average instead of a daily requirement. The BOZ’s policy operations are likely to continue to focus on direct intervention in the FX market to stem volatility in the USD/ZMW pair, with occasional liquidity withdrawal through open market operations (OMOs). Liquidity conditions remain relatively tight even though the overnight interbank rate fell to 15.6% by 26 Jan from 17.6% 6-m earlier.”
She said fiscal restraint under an IMF program would also slow down net domestic issuance of government paper, and probably pull down yields at the long-end of the curve further, making duration attractive.
“However, the market is likely to wait for evidence of a sustainable cut back in domestic issuance before yields fall significantly. However, in the interim the government has actually increased the amount of securities that it issues and had a special bond auction outside its regular auction schedule in December,” she said.
She added, “With a large financing gap, mounting arrears and some K2.9 billons in maturities of paper due in the next 2 months, domestic issuance will likely remain elevated, preventing yields from declining in the near term. Indeed, in December the BOZ announced that T-bill auction sizes would increase to K900 million per auction from K700 million previously while the bond auction sizes would increase to K1.0 billion from K800 million. Additionally, bond auctions will now occur every second month instead of quarterly.”