Bank of Zambia raises monetary policy rate by 50 basis points to 14.5% as drought keeps inflation high

The Bank of Zambia raised its monetary policy rate by 50 basis points to 14.5% on 12 February 2025, tightening policy further to counter rising inflation and support the kwacha. The increase took the rate to its highest level in more than eight years. The central bank had last raised the rate in November 2024, to 14%.

DROUGHT AND CURRENCY PRESSURES

Annual inflation rose to 16.7% in December 2024 from 16.5% in November and 15.7% in October, its highest level since November 2021, and remained at 16.7% in January 2025. Food inflation accelerated to 19.2% in January from 18.6% in December, while non-food inflation eased to 13.2% from 14.2%. Price pressures have built over some 18 months, driven by a severe El Niño-induced drought and depreciation of the currency. Food prices were the main source of pressure in the months before the decision, with food inflation outpacing non-food inflation by a widening margin.

The kwacha weakened by 4.8% against the US dollar in the final quarter of 2024, a decline linked to higher imports of food and electricity needed to offset drought-related shortfalls. Hydropower supplies about 85% of Zambia's electricity, leaving the country's power supply and wider economy vulnerable to climate shocks such as drought.

GROWTH AND FISCAL POLICY

Economic growth picked up to 2.5% in the third quarter of 2024 from 1.9% in the second quarter. Finance Minister Situmbeko Musokotwane has indicated that further monetary tightening remains an option if price pressures persist, as the government seeks to balance fiscal consolidation with efforts to contain inflation.