Fuel price hike effects push CPI to 14-month high but one year t-bills remain attractive at 17.5%

INFLATION for the month of March rose 100bps higher to 7.1% as fuel price hike effects kicked in as reported by the Central Statistics Office – CSO. This represents a 14-month high. The Energy Regulation Board – ERB last month announced a fuel price adjustment on account of rise in global crude prices that edged higher to USD70/bbl. as Oil Producing and Exporting Countries – OPEC nations tightened crude supplies. Zambia ERB weighs the effects of crude price movements factoring in cost calculated by the Dollar – Kwacha exchange rate. The Bank of Zambia has a 6-8% target range of which the March number was within the band at 7.1%, a 100bps rise. The fuel price hike triggered an upward adjustment in transport and other production costs that swelled the two components of the CP index namely food and non-food respectively.

The Bank of Zambia on Thursday 29 March sold ZMW1,127million worth of treasury bill in an auction that was full subscribed with 1.09 bid cover ratio. Yields in the short term government sale were most attractive in the 1-year tenor at 17.5% while the 273 day investment improved 5% to 13%. Individuals searching for returns on investment can consider locking in money in 273 day investment to earn 13% or in 364 day investment to earn 17.5%. Either way with 7.1% inflation the 9 month and 1-year investments offer very attractive compensation premiums for risk in government security.

However demand for one year government investment remains fairly high though appetite decreased slightly accounting for 74% of the debt sale compared to 87% in the previous auction 2-weeks ago.

Treasury Bill auction results . Bid cover ratio was 1.09 with the Bank of Zambia raising ZMW1,127million of the ZMW950million on offer.

The 273 – day treasury bill 500bps rise to 13% was a pricing correction addressing the kink earlier observed in the Kwacha term structure in term interest. See graph below showing the correction in question.

Term structure of Kwacha interest rates comparing the 15 March and 29 March debt sales.

More articles on inflation and treasury bills.