Zambia's central bank increased its key interest rate on Wednesday to its highest level since 2017 to curb inflation and strengthen its weakened currency. 

The monetary policy committee raised the rate from 13.5% to 14%, Governor Denny Kalyalya announced to reporters in Lusaka.

“The decision to raise the policy rate is aimed at steering inflation back towards the target band and anchoring inflation expectations,” he said, going on to add that “we took account of what was happening in the foreign exchange market.”  

Annual inflation has exceeded the central bank’s target range of 6% to 8% since May 2019, Bloomberg reports.  

The Kwacha has lost nearly 3% of its value since 24th October, exacerbating inflation, which is already close to a three-year high of 15.7% due to a severe drought. 

The dry conditions have resulted in a shortage of corn, fish, and vegetables, while the demand for fuel has risen to compensate for electricity shortages, according to Governor Kalyalya. Zambia relies heavily on hydroelectric power, which has been severely impacted by low water levels.

The governor attributed the recent weakness of the currency to growing demand for foreign exchange. After dropping to $7.4 million at the end of September, foreign exchange reserves increased to $52.7 million by 4th November, according to Kalyalya.  

Annual inflation is now expected to average around 15% in 2024, but the Monetary Policy Committee (MPC) has raised its inflation forecasts for the coming years, projecting 13.9% in 2025, up from the 12.7% forecast in August.

“The bank stands ready to take appropriate action should inflation persist above the 6%-8% target band. Decisions on the policy rate will continue to be guided by inflation outcomes, forecasts and identified risks, including those associated with financial stability,” the governor said. 

The rate decision follows a day after the International Monetary Fund said “monetary policy must remain agile to combat inflation while preserving exchange rate flexibility.” It also urged the central bank to drive inflation toward the target band amid “a negative real policy rate, looser liquidity conditions, and strong growth in monetary aggregates.” 

The dry spell has also hindered economic growth.