BOZ Monetary Policy Statement May 2016

8/16/2019 BOZ Monetary Policy Statement May 2016

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MONETARY POLICY COMMITTEE STATEMENT

FOR

SECOND QUARTER 2016

Governor’s Presentation to the Media

17th May, 2016


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INTRODUCTION

The structure of this presentation is as follows:

1. Decision on the monetary policy stance

1. Overview

2. Global economic developments

3. Developments in the domestic economy

4. Macroeconomic outlook

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The MPC decided to maintain the Policy Rate at 15.5%.

The Committee took the following factors into account in decidingto maintain the Policy Rate at 15.5%:

tight monetary policy measures taken in fourth quarter of 2015are producing the desired results;

a relatively stable exchange rate since November 2015;

annual inflation seem to have peaked in the first quarter, and isprojected to slowdown in the remaining quarters of 2016.

monthly inflation has also been declining, reaching 0.3% in April2016 from a peak of 6.2% in October 2015.

MONETARY POLICY DECISION 3


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liquidity conditions remain relatively tight as reflected in highmarket interest rates;

weaker economic growth prospects, which could be adversely

affected by a further tightening of monetary policy; and,

financial stability.

MONETARY POLICY DECISION 4


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OVERVIEW

Liquidity conditionsremained tight in the firstquarter of 2016 due tomonetary policy measuresimplemented in the fourthquarter of 2015.

The interbank rateremained above the PolicyRate corridor and bankslending rates generallyrose.

The Bank left theinterbank rate outside thePolicy Rate corridor dueto the need to contain

pressure on the exchangerate.

-

500.00

1,000.00

1,500.00

2,000.00

-

5.00

10.00

15.00

20.00

25.00

30.00

35.00

7 - A u g - 1 5

2 1 - A u g - 1 5

4 - S e p - 1 5

1 8 - S e p - 1 5

2 - O c t - 1 5

1 6 - O c t - 1 5

3 0 - O c t - 1 5

1 3 - N o v - 1 5

2 7 - N o v - 1 5

1 1 - D e c - 1 5

2 5 - D e c - 1 5

8 - J a n - 1 6

2 2 - J a n - 1 6

5 - F e b - 1 6

1 9 - F e b - 1 6

4 - M a r - 1 6

1 8 - M a r - 1 6

1 - A p r - 1 6

1 5 - A p r - 1 6

2 9 - A p r - 1 6

1 3 - M a y - 1 6

( % )

Excess Reserves 5-day Moving-Ave BOZ Policy Rate

Lower Bound Upper-Bound Interbank RateOLF Rate

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Though the Kwacha depreciated modestly against major foreigncurrencies, the domestic currency remained relatively stable.

OVERVIEW

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OVERVIEW

Annual inflation rose to 22.2% in March 2016 from 21.1% in December2015, but month-on-month inflation continued to decline to 0.5% in

March 2016 and 0.3% in April from 2.1% in December 2015.

(1.0)

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

P e r c e n t

Jan-

14

Feb-

14

Mar-

14

Apr-

14

May-

14

Jun-

14

Jul-

14

Aug-

14

Sep-

14

Oct-

14

Nov-

14

Dec-

14

Jan-

15

Feb-

15

Mar-

15

Apr-

15

May-

15

Jun-

15

Jul-

15

Aug-

15

Sep-

15

Oct-

15

Nov-

15

Dec-

15

Jan-

16

Feb-

16

Mar-

16

Apr-

16

Overall 0.9 0.5 1.2 0.7 0.9 0.4 0.8 0.7 0.2 0.1 0.4 0.7 0.7 0.3 1.0 0.7 0.6 0.6 0.8 0.9 0.7 6.2 5.0 2.1 1.3 1.2 0.5 0.3

Food 0.8 0.6 1.3 0.7 0.8 0.2 (0.1 0.9 0.2 (0.0 0.5 1.3 0.7 0.8 1.0 0.6 0.8 0.2 0.6 0.8 0.5 7.4 6.8 2.5 1.6 1.2 0.9 0.8

Non-food 1.0 0.4 1.2 0.7 1.0 0.7 1.7 0.4 0.3 0.2 0.3 0.2 0.7 (0.3 1.1 0.8 0.4 1.0 1.0 0.9 0.9 5.0 3.1 1.6 0.9 1.2 - (0.3

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GLOBAL ECONOMIC DEVELOPMENTS

In the first quarter of 2016, global economic growth isestimated at 2.6% (IMF WEO, April 2016).

Downside risks to growth persist, reflected in:

falling commodity prices (Table 1)

weakening trade

financial markets volatility

Modest recovery was recorded in the Euro area while growthin China and United States slowed – all adding downwardpressure to global growth.

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Commodity prices continued to decline due to excess supply andsubdued demand.

• Copper prices declined by 4.3% while crude oil fell by 20.4%.

Table 1: Selected Commodity Prices

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In Sub-Sahara Africa, macroeconomic indicators suggest aslowdown in economic activity in the first quarter of 2016 dueto:

further fall in commodity prices

geopolitical and domestic strife in a few countries climate change factors (drought and floods) reduced foreign direct investments in resource rich SSA

countries from China.

External positions of most resource-dependent countriescontinued to deteriorate and foreign exchange reservesremained under pressure.

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SSA Sovereign bonds prices rose (yields declined) on the backof a broadly weak US dollar.

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Consistent with other SSA Eurobonds, yields on the ZambianEurobonds fell as rising copper prices (particularly in March)added to improved sentiments for the domestic economy.

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OUTLOOK:

IMF WEO (April 2016) revised downwards global growth to 3.2% in2016 from the earlier projection of 3.4%.

Advanced countries expected to grow at 1.9% in 2016

Growth in the US is expected to remain stable at 2.4%

In the Euro area, growth is projected to be around 1.5%

In emerging and developing economies, growth is projected to rise

marginally to 4.1% from 4.0% in 2015.

Growth in China is projected to be around 6.5% in 2016

In SSA, growth is projected to be 3.0%, the lowest in the past 15 years.

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DOMESTIC ECONOMIC DEVELOPMENTSMonetary Policy

Monetary policy continued to focus on dampening inflationarypressures and maintaining relative exchange rate stability.

A tight monetary policy stance was maintained during the review period.

The Bank continued to restrict access to the Overnight Lending Facility(OLF) window to stem the growth in Kwacha liquidity.

As a result, the interbank rate, at 26.9%, persisted above the upper bound of the Policy Rate corridor and OLF rate (Figure 1 below).

The Bank deliberately did not supply funds to the market to bring theinterbank rate back into the Policy Rate corridor in order to helpcontain the persistent pressures on the exchange rate.

As at May 16, 2016, the interbank rate declined to below 20.0%,

reflecting easing liquidity conditions.

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Figure 1: Policy Rate Corridor and Interbank Rate

DOMESTIC ECONOMIC DEVELOPMENTSMonetary Policy

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500.00

1,000.00

1,500.00

2,000.00

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10.00

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20.00

25.00

30.00

35.00

7 - A u g - 1 5

2 1 - A u g - 1 5

4 - S e p - 1 5

1 8 - S e p - 1 5

2 - O c t - 1 5

1 6 - O c t - 1 5

3 0 - O c t - 1 5

1 3 - N o v - 1 5

2 7 - N o v - 1 5

1 1 - D e c - 1 5

2 5 - D e c - 1 5

8 - J a n - 1 6

2 2 - J a n - 1 6

5 - F e b - 1 6

1 9 - F e b - 1 6

4 - M a r - 1 6

1 8 - M a r - 1 6

1 - A p r - 1 6

1 5 - A p r - 1 6

2 9 - A p r - 1 6

1 3 - M a y - 1 6

( % )

Excess Reserves 5-day Moving-Ave BOZ Policy Rate Lower Bound

Upper-Bound Interbank Rate OLF Rate

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With tight liquidity conditions, trading in the interbank marketincreased by 27.2% to K33.6 billion.

Figure 2: Volume of Interbank Transactions

DOMESTIC ECONOMIC DEVELOPMENTSMoney Market

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The volume of liquidity accessed through OLF window fell toK13.3 billion from K32 billion.

DOMESTIC ECONOMIC DEVELOPMENTSMoney Market

Figure 3: OLF Transactions

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Tight liquidity conditions posed a roll-over risk for Governmentsecurities in the first quarter of 2016 compared to the fourth quarterof 2015 as reflected in deficits on auctions (Figure 4).

The subscription rates for Government securities improved as more

non-bank financial institutions participated in the auctions.

In the Treasury bill market, subscription rates rose to an average of58.1% from 32.5%.

In the Government bonds market, subscription rates increased to38.1% from 4.0%.

However, the outstanding stock of Treasury bills and bonds fell by

10.5% and 0.7% to K9.0 billion and K10.1 billion, respectively due to

net maturities.

DOMESTIC ECONOMIC DEVELOPMENTSGovernment Securities Market

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Figure 4: Performance of Government Securities Auctions


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Yield rates on Government securities increased further asmoney market liquidity remained tight.

The weighted average Treasury bill yield rate rose to 27.4%from 20.7%.

The weighted average Government bond yield rate alsoincreased to 27.5% from 25.9% (Figure 5).


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5.00

10.00

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30.00

Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16

P e r c e n t

Tbills Average Composite Rate Bonds Average Composite Rate

Figure 5: Government Securities Composite Yield Rates

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Foreign investors’ holdings of Government securities declinedfurther due to, among other things, risk aversion towardsemerging and developing economies.

Figure 6: Foreign Portfolio Holdings

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Banks’ nominalinterest rates rosedue to high fundingcosts, tight liquidityand high inflation.

Banks lending ratesranged between15.5% to 41% whilethe average rose to27% from 23.8%.

The savings rate foramounts aboveK20,000.00 alsorose to 12.9% from10.8%

DOMESTIC ECONOMIC DEVELOPMENTSBanks Nominal Interest Rates

Figure 7: Nominal Interest Rates

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Though the Kwacha depreciated by a modest 1.4% against the USdollar, the domestic currency remained relatively stable.

DOMESTIC ECONOMIC DEVELOPMENTSForeign Exchange Market

Figure 8: Exchange Rate Developments

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During the quarter, the supply of foreign exchange declinedsharply.


1,671

1,959

240207 156

-37-83 -87

8

-257

-340

-55

-685

-859

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(1,000.00)

(500.00)

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1,000.00

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2,000.00

2,500.00

Quarter 3 -2015 Quarter 4 -2015 Quarter 1-2016

U S D ' M i l l i o n s

Mining FA Foreign - Bank Wholesale and Retail Manufacturing Total Other

Figure 9: Net Supply of Foreign Exchange

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Demand for US dollars from the public declined as reflected incommercial banks net purchases during the review period.


(20)

36

229

184

(98)

(167)

194

(42)

(149)

152

(138)

(260)

57

(300)

(200)

(100)

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200

300

Qtr1 Qtr2 Qtr3 Qtr4 Qtr1 Qtr2 Qtr3 Qtr4 Qtr1 Qtr2 Qtr3 Qtr4 Qtr1

2013 2014 2015 2016

U

S $ M i l l i o n

Figure 10: Banks’ Net Purchases of FX from the Pubic

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On a quarterly basis, money supply contracted 4.9% in the firstquarter compared to a growth of 1.5% in the fourth quarter of2015.

On an annual basis, money supply growth slowdown to 19.9%

from 35.2% in the previous quarter.

Credit contracted by 3.8% compared to a contraction of 5.3% on aquarter-on-quarter basis.

On an annual basis, credit growth slowed down to 7.0% in March2016 from 21.2% in December 2015.

Slowdown in money supply and credit growth reflects tightmonetary conditions.

DOMESTIC ECONOMIC DEVELOPMENTSMoney Supply and Credit

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DOMESTIC ECONOMIC DEVELOPMENTSMoney Supply and Credit

Figure 11: Money Supply Developments Figure 12: Developments in Credit

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Economic activity remained subdued in the first quarter of2016 as evidenced by reduction in:

imports

exports

consumer spending

volume of services (tourism, financial and transportsectors)

Power generation, mining output, cement production andtourist arrivals also declined (Figures 13 and 14).

DOMESTIC ECONOMIC DEVELOPMENTSReal Sector Activity

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2,000,000

2,200,000

2,400,000

2,600,000

2,800,000

3,000,000

3,200,000

3,400,000

3,600,000

2 0 1 2 Q 1

2 0 1 2 Q 2

2 0 1 2 Q 3

2 0 1 2 Q 4

2 0 1 3 Q 1

2 0 1 3 Q 2

2 0 1 3 Q 3

2 0 1 3 Q 4

2 0 1 4 Q 1

2 0 1 4 Q 2

2 0 1 4 Q 3

2 0 1 4 Q 4

2 0 1 5 Q 1

2 0 1 5 Q 2

2 0 1 5 Q 3

2 0 1 5 Q 4

2 0 1 6 Q 1

-35

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0

5

10

15

Power Generation

Electricity (MWh) Year-on-year Change (%)

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10,000.00

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30,000.00

35,000.00

0

50,000

100,000

150,000

200,000

250,000

300,000

2 0 1 2 Q 1

2 0 1 2 Q 2

2 0 1 2 Q 3

2 0 1 2 Q 4

2 0 1 3 Q 1

2 0 1 3 Q 2

2 0 1 3 Q 3

2 0 1 3 Q 4

2 0 1 4 Q 1

2 0 1 4 Q 2

2 0 1 4 Q 3

2 0 1 4 Q 4

2 0 1 5 Q 1

2 0 1 5 Q 2

2 0 1 5 Q 3

2 0 1 5 Q 4

2 0 1 6 Q 1

Mining Sector Output

Copper (MT) Gemstones (KG)

Figure 13: Power Generation and Mining Sector Output

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0

10

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30

40

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100,000

200,000

300,000

400,000

500,000

600,000

2 0 1 2 Q 1

2 0 1 2 Q 2

2 0 1 2 Q 3

2 0 1 2 Q 4

2 0 1 3 Q 1

2 0 1 3 Q 2

2 0 1 3 Q 3

2 0 1 3 Q 4

2 0 1 4 Q 1

2 0 1 4 Q 2

2 0 1 4 Q 3

2 0 1 4 Q 4

2 0 1 5 Q 1

2 0 1 5 Q 2

2 0 1 5 Q 3

2 0 1 5 Q 4

2 0 1 6 Q 1

Cement Production

Cement (MT) Year-on-year growth

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0

5

10

15

2 0 1 2 Q 1

2 0 1 2 Q 3

2 0 1 3 Q 1

2 0 1 3 Q 3

2 0 1 4 Q 1

2 0 1 4 Q 3

2 0 1 5 Q 1

2 0 1 5 Q 3

2 0 1 6 Q 1

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20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

Tourist Arrivals

Tourist Arrivals Year-on-year Change (%)

Figure 14: Cement Production and Tourist Arrivals

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Government registered a small fiscal surplus, which was usedon domestic debt repayment and other critical expenditureneeds.

DOMESTIC ECONOMIC DEVELOPMENTSFiscal Performance

Figure 16: Fiscal Performance

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DOMESTIC ECONOMIC DEVELOPMENTSInflation

Inflation rose modestly to 22.2% in March 2016 from 21.1% inDecember 2015.

Food inflation rose to 26.2% from 24.8%.

Non-food inflation increased to 17.9% from 17.1%.

Increase in inflation attributed to:

high production costs;

low supply of selected food items;

grain deficit in the region;

increase in taxes and customs duty on some non-food items.

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5.0

10.0

15.0

20.0

25.0

30.0

J a n - 1 5

F e b - 1 5

M a r - 1 5

A p r - 1 5

M a y - 1 5

J u n - 1 5

J u l - 1 5

A u g - 1 5

S e p - 1 5

O c t - 1 5

N o v - 1 5

D e c - 1 5

J a n - 1 6

F e b - 1 6

M a r - 1 6

A p r - 1 6

P e r c e n t

Overall Inflation Food inflation Non-food inflation

Figure 17: Inflation Developments

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Month-on-month inflation continued to slowdown to 0.5% in March 2016from 2.1% in December 2015. In April 2016, month-on-month inflationdeclined further to 0.3%.

(1.0)

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1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

P e r c e n t

Jan-

14

Feb-

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Mar-

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Apr-

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May-

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Jun-

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Jul-

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Aug-

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Sep-

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Oct-

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Nov-

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Dec-

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Jan-

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Overall 0.9 0.5 1.2 0.7 0.9 0.4 0.8 0.7 0.2 0.1 0.4 0.7 0.7 0.3 1.0 0.7 0.6 0.6 0.8 0.9 0.7 6.2 5.0 2.1 1.3 1.2 0.5 0.3

Food 0.8 0.6 1.3 0.7 0.8 0.2 (0.1 0.9 0.2 (0.0 0.5 1.3 0.7 0.8 1.0 0.6 0.8 0.2 0.6 0.8 0.5 7.4 6.8 2.5 1.6 1.2 0.9 0.8

Non-food 1.0 0.4 1.2 0.7 1.0 0.7 1.7 0.4 0.3 0.2 0.3 0.2 0.7 (0.3 1.1 0.8 0.4 1.0 1.0 0.9 0.9 5.0 3.1 1.6 0.9 1.2 - (0.3

Figure 18: Month-on-month Inflation Developments

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GDP growth projected at 3.7% in 2016, but to strengthensignificantly thereafter.

The projected growth reflects the continuing headwinds, which

include power supply shortages, reduced investments andsluggish global growth.

In the medium term, growth is projected to rebound to levelsclose to historical average (6%).

MACROECONOMIC OUTLOOK 37


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Inflation is projected to decelerate in the remaining quarters of2016, with a sharp decline in the fourth quarter of 2016 towardssingle digit levels.

In the second quarter, inflation is projected to average 20.3%,partly reflecting improved supply of food during the harvestseason and relative exchange rate stability.

Inflation is projected to average 17.7% in the third quarter and todecline further to an average of 8.7% in the fourth quarter of2016.



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The outlook from the results of the survey of business opinionsand expectations indicate (Figure 18 below):

Slowdown in inflation expectations in the second quarter of2016, mainly on account of improved food supply and relativelytight monetary policy;

Moderation in the rate of depreciation of the exchange rate;

Slight easing of credit conditions in the second quarter of 2016;and,

Lending rates remaining relatively high in the second quarter of2016.



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MACROECONOMIC OUTLOOK

-3 -2 -1 0 1 2 3

Inflation expectations

Credit expectations

Lending rates expectations

Exchange rate expectations

2016_Q1 2015_Q3 2015_Q1

Figure 19: Expectations

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End of Presentation…

Thank you…

Documents

BOZ Monetary Policy Statement May 2016