TRYNESS MBALE, Lusaka
THE Africa Development Bank (AfDB) has observed that Zambia needs to understand the mechanism through which monetary policy is propagated to achieve the key objectives of the central bank.
According to a working paper on, Bank Lending Channel of Monetary Policy Transmission in Zambia: Evidence from commercial banks conducted the AfDB last month, indicates that the understanding of the mechanism through which monetary policy is propagated can also enhance macroeconomic stability of the country’s economy.
“Understanding the mechanism through which monetary policy is propagated is essential in achieving the key objectives of the central bank and enhancing macroeconomic stability in the economy.
“This is particularly imperative for Zambia, and developing countries in general, where lack of well-functioning financial markets limit the effectiveness of monetary policy actions.
The report explored the effect of monetary policy on lending behaviour of commercial banks in Zambia and the purpose of the paper is to assess the extent to which the bank lending channel (BLC) of monetary policy transmission applies in Zambia.
It also endeavoured to provide evidence on the bank lending channel of monetary transmission in Zambia, using bank-level data.
Some of the findings of the paper are that the monetary policy anchored on price signals is more potent than that based on quantity aggregates due to insignificance of its indicators based on quantity variables such as net open market operation (OMO) interventions and by extension, the change in reserve money.
The paper notes that the distributional effects of monetary policy only operates through the 91-day treasury bill rate.
It says large banks respond more strongly to monetary policy shocks while the lending response for medium-sized banks is relatively weaker, therefore, this irregular lending response by small banks does not appear to show that this group of banks shelters its clients from adverse shocks under credit constraints.