THE Bank of Zambia (BoZ) has the policy mandate of assessing and achieving a stable rise in Gross Domestic Product (GDP), keeping unemployment low and maintaining the exchange rate and inflation in a predictable range.
To achieve this, the Central Bank in accordance with the BoZ Act of 2022 implements the monetary policy in line with the inflation targets, consistent with the government's broader medium and long-term macroeconomic objectives.
The macroeconomics objectives include the real GDP which is the market value of all goods and services produced within the country in a given period of time, the fiscal deficit or financial position, domestic borrowing and accumulation of reserves that are measured in terms of months of import cover.
The monetary policy is formulated through the Monetary Policy Committee (MPC) which sits quarterly to decide on the Monetary Policy Rate (MPR).
This is done by reviewing economic developments in the previous quarter and prospects for inflation eight quarters ahead or over the forecast horizon.
The MPC consists of nine members, the BoZ Governor and the two deputies.
Other members are the director responsible for research and economic policy, director for monetary policy operations, director responsible for finance stability and three external members appointed by the board and the Ministry of Finance and National Planning.
BoZ defines the MPR as the interest rate charged by the Central Bank to commercial banks for the money borrowed as short-term loans which banks in turn lend to corporates.
Commercial banks use the MPR determined by the Central Bank for a given quarter as interest to be paid for the money that corporates borrow.
The bank further explains that the MPR guides open market operations and is expected to influence the overnight interbank rate or the operating target which in turn impacts inflation through changes in market interest rates.
MPR's role Economic growth: Lower MPR can stimulate economic growth by making borrowing cheaper, increasing consumption, and encouraging investment.
Currency value: The MPR can impact the value of a country's currency. Higher MPRs can attract foreign investors, causing the currency to appreciate, while lower MPRs can lead to depreciation.
Unemployment: By influencing economic growth, the MPR can also impact unemployment rates.
Lower MPRs can lead to job creation, while higher MPRs can lead to job losses.
Bank lending: The MPR sets the basis for interest rates charged by commercial banks.
Changes in the MPR can affect borrowing costs and credit availability. Savings and investment: The MPR can influence savings and investment decisions. Higher MPRs can encourage savings, while lower MPRs can encourage investment.
Financial stability: The MPR can help maintain financial stability by controlling excessive borrowing and spending.
Some economic experts further explain the MPR and its role in ensuring economic stability.
Partner Siabutuba says, by adjusting the MPR, the Central Bank can influence inflation rates as higher MPRs can help reduce inflation by increasing borrowing costs and reducing consumption which leads to inflation.
Mr Siabutuba says through the MPR, the Central Bank determines the cost of borrowing in the economy in terms of how expensive or affordable borrowing from commercial banks will be for a given quarter.
Mr Siabutuba explains that if the cost of money is low, many people will go to the bank to borrow and offload the money into the economy for different economic activities.
But that can lead to high consumption resulting in inflation where there is too much money chasing fewer goods, he says.
Mr Siabutuba further explains that to prevent inflation, the MPC will decide to regulate the cost of borrowing money and in this case the MPR.
Mr Siabutuba says inflation is therefore used as the critical indicator to decide whether to increase or decrease the MPR.
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He further states that when the MPR is increased, the cost of borrowing goes up and as a result, commercial banks avoid borrowing from Central Bank.
"What this means is that there is less money in circulation, so the MPR is therefore a measure taken by BoZ to withdraw money from circulation when inflation is going up," he says.
Another economist Noel Kabwita says the MPC decides the MPR through its quarterly sitting, review the performance of inflation, the kwacha and other economic factors.
Mr Kabwita says the committee analyses the state of the economy every three months and gives out a position on whether to increase the MPR or reduce it.
He says through the MPR, the BoZ helps to bring stability to the economy by regulating the cost of money in the financial market.
"Since Zambian people can't borrow money directly from Central bank, they borrow through commercial banks who borrow from BoZ," he says.
Mr Kabwita says in cases where the Central Bank increases the MPR, commercial banks also increase the interest rate on loans that are given to corporates as well as individuals.
