Kwacha rallies most in 7 years as Zambia tackles drop

The Bank of Zambia selling dollars into the market and raising its overnight lending rate “sends a very powerful signal” the country is dealing with weakness in its currency, which rallied the most this week in seven years, said Razia Khan, chief Africa economist at Standard Chartered Plc.

The Bank of Zambia has “aggressively” intervened in the market to support the kwacha, First National Bank Zambia, the local unit of Johannesburg-based FirstRand Ltd., said in an e- mailed note. The central bank also raised the interest rate it charges to lend commercial banks overnight to 25.5 percent, according to a circular dated Nov. 10. The rate was set at 1,000 basis points above the policy rate.

The kwacha advanced for a third day, gaining as much as 7.6 percent against the dollar to 11.555. It was 4.8 percent stronger at 11.90 by 5:18 p.m. in Lusaka, the capital. The currency rallied more than 10 percent this week, the most since November 2008. That helped to pare losses this year to 47 percent, the most among 155 tracked by Bloomberg, as a power crisis, low copper prices and a rising budget deficit weigh on the economy.

Increasing the overnight facility rate was “very significant –- it demonstrates the seriousness with which the authorities are dealing with currency weakness,” Standard Chartered’s Khan said in reply to e-mailed questions. “It sends a very powerful signal.”

The Bank of Zambia increased the overnight rate as it tries to curb inflation, which nearly doubled to 14.3 percent year-on- year in October. Prices accelerated mainly because of the falling currency making imports more costly, while the power crisis causes lower production. That prompted the central bank to raise its policy rate by 3 percentage points to 15.5 percent on Nov. 3.

While the bank has taken the correct approach in increasing the supply of dollars on the local market, the kwacha will continue to weaken because of lower copper prices, according to Irmgard Erasmus, an analyst at NKC African Economics in Paarl, near Cape Town. Risks posed to Zambia by El Nino and interest rates increasing in the U.S. could also cause the the currency to depreciate, she said in an e-mailed note.

The Bank of Zambia has spent $510 million supporting the kwacha this year, and reserves rose to $3.87 billion at the end of July. The figure of $4.83 billion in reserves the bank reported for the end of August in its latest data was incorrect, a spokesman said by e-mail, without providing the right number.

The kwacha will weaken to 14.50 to the dollar by year-end, Ridle Markus, an Africa strategist at Barclays Plc’s unit in Johannesburg, said in an e-mailed note Thursday. That’s more optimistic than Standard Chartered analysts Samir Gadio and Eva Murigu, who in a Nov. 11 note predicted the currency would end 2015 at 15 to the dollar.

– Bloomberg [Matthew Hill]