Zambia May Pause Rate Hikes After Inflation Holds Steady at 16.5%

Zambia’s central bank may pause its aggressive rate-hiking cycle after inflation stabilized at 16.5% in April 2025, matching March’s reading and marking the first sustained deceleration since June 2023. This signals a potential turning point in the country’s fight against inflation, though persistent risks—such as non-food price pressures and a weakened kwacha—mean policymakers remain on guard.

Inflation Dynamics: A Fragile Balance

The April inflation figure, released on April 24 by the Zambia Statistics Agency (ZamStats), confirmed a stabilization in price growth after a peak of 16.8% in February. The moderation is largely attributed to improved agricultural conditions, with food inflation easing to 18.9% in March (the most recent breakdown) from 20.6% in February. Favorable rainfall reduced pressure on staples like mealie meal, meat, and vegetables, which collectively account for 54% of Zambia’s consumer price index (CPI).

However, non-food inflation remains a concern. Prices for housing, utilities, pharmaceuticals, and imported goods rose to 13.2% year-on-year in March, up from 11.7% the prior month. This reflects lingering supply-side challenges, including a 14.9% annual depreciation of the kwacha against the U.S. dollar, which fuels imported inflation. Monthly inflation in March also slowed to 1% from February’s 2.4%, suggesting near-term stability.

Central Bank’s Crossroads: Pause or Proceed?

The Bank of Zambia (BoZ) has raised its benchmark policy rate to 14.5%—its highest since 2017—to combat inflation that once hit a six-year high of 16.8%. While the April stabilization may prompt a pause in further hikes, policymakers face a delicate balancing act.

• Case for a Pause: The stabilization aligns with BoZ’s goal of anchoring inflation expectations. Governor Denny Kalyalya has emphasized that “monetary policy remains data-dependent,” and the April data could justify holding rates steady to avoid stifling economic growth.
• Persistent Risks: Non-food inflation and the kwacha’s volatility remain threats. The currency’s 1.9% monthly decline in March underscores its vulnerability to external shocks, such as commodity price swings or delayed debt restructuring progress.

BoZ’s projections suggest inflation will average 14.6% in 2025, gradually declining to 7.6% by 2026, according to IMF estimates. However, the central bank’s medium-term target of 6–8% remains distant, likely unachievable before 2027.

Economic Outlook: Growth vs. Inflation Tug-of-War

Zambia’s economy is navigating a recovery, with Q4 2024 GDP growth of 8.6% driven by rebounding agriculture and mining sectors. The BoZ forecasts 6.6% GDP growth in 2025, assuming stable rains and higher copper exports. Yet inflation’s persistence could dampen household purchasing power and corporate investment.

Key Risks to the Outlook

1. Kwacha Depreciation: A weaker currency fuels imported inflation, particularly for fuel and electricity. Zambia’s reliance on hydropower—85% of its energy mix—leaves it exposed to droughts and energy import costs.
2. Non-Food Price Pressures: Rising healthcare, housing, and utility costs could offset gains in food stability, requiring further BoZ intervention.
3. Debt Restructuring: Progress on renegotiating $14 billion in external debt with creditors remains critical to stabilizing investor confidence and forex markets.

Conclusion: A Fragile Equilibrium

Zambia’s decision to pause rate hikes hinges on whether April’s stabilization persists. The 16.5% inflation rate offers a reprieve from earlier highs, but the economy remains in a precarious equilibrium. Policymakers must navigate non-food inflation, exchange rate pressures, and growth needs without reigniting price surges.

Investors should monitor two key indicators:
- Monthly inflation trends: A further decline in May could solidify confidence in a pause.
- Kwacha stability: A depreciation beyond 3.8% annualized risks reigniting imported inflation.

While the April data suggests cautious optimism, the path to the BoZ’s 6–8% target remains long. For now, the pause in rate hikes appears justified—but the battle against inflation is far from over.