Bank of Zambia introduces policy rate

By CYNTHIA MWALE
THE Bank of Zambia (BoZ) has introduced a policy rate that will allow the central bank to signal an increase or decrease in the price of credit in the market.
The central bank says transparency in the interest rate determining behaviour among commercial banks is very important as it implies openness, effective communication and accountability.
“The Bank of Zambia has, over the past few years, been working with commercial banks to design a transparent framework for determining interest rates in Zambia,” BoZ head of public relations Kanguya Mayondi said.
The move will enable borrowers to understand the basis upon which commercial banks price their credit products.
Mr Mayondi said this in a statement issued in Lusaka yesterday.
The policy rate, to be effected from April 2, 2012, is used to influence monetary and credit conditions in an economy.
He said the first BoZ policy rate will be announced tomorrow, March 29, 2012.
Mr Mayondi said the central bank will be issuing a monthly communiqué covering, among other things, factors taken into account when arriving at its decision on the policy rate as a means of explaining its monetary policy stance.
Mr Mayondi said the development will allow BoZ to clearly signal its monetary policy stance to market, providing financial market participants with a credible and stable anchor for the setting of interest rates on their credit products.
The other benefit to be accrued from the policy rate is that the increased reliance on interest rate policy-based instruments is expected to provide a relatively more transparent and efficient process through which BoZ can better anchor inflation expectation.
“Following this reform, it is expected that the standard practice of quoting the price of the loans and similar credit products by all commercial banks will be the BoZ policy rate plus a margin,” he said.
He said the margin will be set by commercial banks on the basis of their risk premium assessment adding that this is a transparent way of pricing credit products, which will enhance many stakeholders’ business planning processes and assist in efficiently managing their financial commitments.
He advised the public that BoZ in collaboration with other stakeholders will continue to work on building an effective and efficient financial system which is expected to benefit all parties accordingly.