MPC – How the 5th Force Continues to Reign

On 16^th November 2016, the central bank governor Denny Kalyalya announced the decisions of the monetary policy committee (MPC). This quarterly announcement sets the tone of how the money in the country will “behave” over the coming months. With the budget recently announced by the finance minister, financial institutions listened with intent on how they will navigate the macro forces that would be presented. On this occasion, we can only imagine the relief that came when the announcement was made that the policy rate would be maintained at 15.5%. One of the reasons for this was an improved inflation rate of 12.5% (down from the early 20s).

With inflation heading south for Christmas (towards single digit), it’s understandable why the governor is bullish on the economic outlook. This is seen through the signal of reducing restrictions on money flow by removing restrictions on banks’ access to the Overnight Lending Facility (OLF). Furthermore, the central bank will allow the banks’ automatic conversion of intra-day credit to overnight loans on the OLF and extend the banks’ compliance to statutory reserve requirements from daily to the weekly average (according to the policy statement).

This move echoes the finance minister’s statement in the budget speech where he indicated support for the financial system to get more cash into circulation. This is good news for premier banks such as Standard Chartered, Invest Trust and Cavmont (all listed on LUSE) as this will certainly influence their competitive strategies for the coming year. With the consumer in mind, these banks will certainly be looking for ways to bring products to market at a good price. We will not speculate that interest rates will fall as the reserve rate and OLF (both influence loan interest rates) have been maintained at 15.5% and 25% respectively. However, with more liquidity available, this may get the banks thinking of how to extract more value from the surplus cash available.

Although the recent increase in fuel may impact the inflation rate in the medium term, there is confidence from the central bank that single digit inflation is attainable by year end. Premier companies will be keen to see how this plays out as they look to closing out the year with less inventory on their balance sheets. With the year almost at a close, surges in pricing may have a negative effect on revenue growth as more consumer products become elastic.  

Whatever the case, we see a change in tide for monetary policy going forward. The New Year should be meet with capital budgeting strategies that can take advantage of this change. We all need cheaper money to survive in the game.