Banks warn of higher interest rates

Interest rates on loan facilities should not be expected to reduce immediately because the annual inflation rate is still too high, says the Bankers Association of Zambia (BAZ).

BAZ says interest rates are expected to increase starting next month on account of the challenging economic environment. Commercial banks have maintained high interest rates on all their loan facilities despite improved liquidity conditions on the local financial market.

According to the Bank of Zambia (BoZ), liquidity conditions eased in April and May with an improvement in subscription rates on government securities. Zambia’s annual inflation rate on the other hand, dropped to 21.3% last month down from 21.8% in April.

However, BAZ chief executive officer, Leonard Mwanza, said the annual inflation rate, among others, remained a key macroeconomic indicator that would keep lending rates on loan facilities high.

“When you look at the way interest rates are set, inflation also takes a big chunk. So, if we just look at the increase in liquidity, we should also be looking at the rate at which inflation is sitting; this is quite closely aligned to the cost of borrowing in terms of the Treasury-Bill rate. From that perspective, one wouldn’t expect that we should see an immediate reduction in lending rates from the current levels,” Mwanza said in an interview.

“The risk-free rate, that is the rate at which government is borrowing through treasury bills, is still around 22-25 %. The psychology of reducing interest rates hasn’t really played out very effectively when you look at the cost of treasury bills.”

He explained that it would take a while for the improved liquidity on the local market to take effect on pushing interest rates down.

“We can’t see immediate pass-through effects where you see banks start restructuring and reduce lending rates. But obviously, if we forecast that improved liquidity will remain elevated for much longer and then we see inflation being projected coming down, it goes without question that definitely, we will see a reversal in the movement of interest rates but that is too early,” Mwanza, a former NATSAVE managing director, added.

“What we are seeing is a positive thing that liquidity has stabilised on the market, especially in the last two months, but then inflation still remains elevated; the treasury bills are still in the elevated range so you don’t expect interest rates overnight to start coming below inflation; that is impossible.”
Lending rates on personal loan facilities currently remain unchanged, ranging from as low as 34% to as high as 48% among some commercial banks.

SOURCE: The Post Newspaper

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