THE UNIVERSITY OF ZAMBIA SCHOOL OF HUMANITIES AND SOCIAL SCIENCES DEPARTMENT OF ECONOMICS NAME: CHIKWANDA MULENGA.A. COMPUTER NO: 2020000351 COURSE CODE: ECN 3225 MACROECONOMICS ASSIGNMENT 2 LECTURER: DR BONA CHITAH DUE DATE: 8TH SEPTEMBER 2023 Q/N: IS THE BANK OF ZAMBIA JUSTIFIED IN ITS FOCUS ON INFLATION RATE IN THE CURRENT DESIGN OF MONETARY POLICY . The Central Bank of Zambia raised its key interest rate by 50 bps to 10% at its meeting on August 23rd 2023, after lifting it by 25 bps in May. It was the third successive rate hike in the current year, pushing borrowing costs to their highest point since April 2020, as inflation had moved even further above the central bank's target of 6% to 6% and was anticipated to remain elevated. The headline inflation rate in Zambia accelerated to 10.3% in July 2023, the highest since April 2022, up from 9.8% in June, and it is expected to average 10.2% in 2023 and 9.3% in 2024 and the first half of 2025. Policymakers said that elevated maize grain prices and tight global financial conditions are the main factors of the current inflation outlook, alongside higher global food and energy prices due to the prolonged war in Ukraine. Regarding domestic activity, GDP growth is expected to decrease in 2023 due to ongoing contraction in the mining sector, but a recovery is foreseen in the medium-term. Central banks today primarily use inflation targeting in order to keep economic growth steady and prices stable. With a 2-3% inflation target, when prices in an economy deviate the central bank can enact monetary policy to try and restore that target. Does this make the Bank of Zambia justified in its increase of its interest rates in order to combat this hike inflation? I believe the central bank is justified and the following are a few reasons. In a statement released by the central bank in august 2023 we see that there is an increase in inflation in the second quarter of 2023 and we noticed a rise in maize grain prices and other basic commodities such electricity tariffs resulting in a high cost of living. Structural reforms such as fiscal deficits, debt restructuring, etc undertaken by government to attract investments and increase private economic growth can all be undermined if rising inflation is left unchecked. It is therefore in the central banks mandate to achieve and maintain price and financial system stability using monetary policy to steer inflation back to the target 6 – 8 % and anchor inflation expectation as this greatly affects future inflation and investment. When inflation is left unchecked this may lead to hyperinflation. Hyperinflation can cause several adverse consequences. People may begin hoarding goods, such as food. In turn, there can be food supply shortages. When prices rise excessively, money decreases in value because inflation causes it to have less purchasing power. Therefore, the Bank of Zambia is justified and acting within its mandate to carry out monetary policy to focus on the rising inflation. REFRENCES 1. Blanchard et al, Macroeconomics 8th edition Pearson publishers, 2013. 2. MPC statement august 2023 Bank Of Zambia. 3. www.imf.com 4. www.investopia.com
