Rate Cap Signals Closer BoZ Involvement
BMI View: The Bank of Zambia recently announced that it would cap interest rates on commercial bank loans at 18.25%, in a move which it says will help borrowers straining under the high cost of loans. While the cap is relatively high and should not be an overly onerous burden on banks, the decision demonstrates that the government is willing to use a heavier hand in the banking sector.
The Bank of Zambia (BoZ) announced at the end of December that it would cap commercial lending rates at 18.25%, in a bid to lower the cost of borrowing and help stimulate a broader-based economy. We believe that the move is not a cause for immediate alarm in the banking sector given the cap is set at a relatively high level; however, we interpret the decision as an indication that officials are open to using more direct controls to manage the economy, potentially opening the door to more substantial changes.
Headline inflation is on the rise, reaching 6.9% year-on-year in November, the most recent month for which data is available, compared to 6.8% in October and continuing a slow steady upward trend which began in July, when price growth was 6.2%. Authorities have blamed rising food prices for the increase. In response to rising inflation and the ongoing weakening of the Zambian kwacha, the BoZ elected to increase its benchmark interest rate - on which the central bank's overnight lending facility is based - to 9.25% in October, the first time it has altered its stance since the benchmark was inaugurated in March. We expect that further hikes could be on the horizon, as inflation has yet to peak and currency weakness persists (the kwacha has depreciated more than 10.0% since its highs in July, standing at ZMK5,230/US$ at the time of writing on December 27). Officials are likely concerned about the possibility that in response to the hikes, commercial banks may increase their lending rates to prohibitive levels, spurring the decision to set the cap.
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