Adapting Monetary Policy for Diverse Economies

Me: May I meet you? MPC Rate: Yes. Zambian Economy: I am not who you think I am. There is something we need to confront honestly this week. Monetary policy is set for one unified economy, but Zambia is not one economy. It is a set of parallel tracks that respond differently to the same signal. The three rate charts below illustrate part of the story. When the policy rate rose, retail borrowers absorbed the shock while corporate lending stayed insulated. Margins narrowed in both segments, but the decrease was far less pronounced for households with limited bargaining power. Meanwhile, 12-m retail deposits barely moved, while banks selectively paid up for corporate funding to defend their liquidity. This is why a 25-basis-point cut cannot deliver broad relief. The structure does not transmit policy. It protects balance sheets and preserves margins. Although we do not have comparable disaggregated evidence for behaviour in an easing environment, as the Bank of Zambia only began publishing disaggregated retail and non-retail lending rate data in 2023, the structure itself offers guidance. Retail borrowers are captive. Corporates multi-bank and shift business quickly. The dynamics that created insulation during tightening will shape behaviour in easing. The architecture beneath the charts matters. The system remains shallow, dollar-dominated, and sovereign-centred. A lower policy rate is not the same as improving affordability. It does not close the gap between those who can borrow and the many who cannot. Moreover, because lower inflation only means prices rise more slowly, it does not ease the real cost of living for many outside the formal credit channel. Zambia has a structurally K-shaped household economy and a four-track credit economy. • A small formal segment with access to credit. • A larger formal segment with income but no access. • An informal sector where income is unstable and inflation bites hardest. • A separate informal credit ecosystem outside monetary policy. One policy rate. Four different outcomes. This is why the conversation about easing requires discipline. A premature cut offers comfort to the small formal segment that already borrows. It does not change access for new entrants or expand inclusion. The majority, who carry the highest inflation burden, feel nothing. In practice, easing under these conditions slows disinflation by sustaining spending power for the least vulnerable while prices remain elevated for everyone else. This is not an argument for permanent tightness. It is an argument for sequence—structure before sentiment. Transmission must be built before easing can work. On Wednesday, I will release Part Two of the series titled "Money Base and Credit. Why Easing Will Not Transmit." It will walk through the data in detail, including money supply structure, foreign currency share in deposits, IMF findings, and the allocation patterns that shape daily economic life. Image: Bank of Zambia, Own Research

https://lnkd.in/dgPvW449 As Governor of the National Bank of the Kyrgyz Republic, I am pleased to share my article in International Banker on “Monetary Policy Modernization in Developing Countries: Kyrgyzstan’s Experience on the Path to Financial Stability and Innovation.” In the article, I explain how, over the past decade, we have pursued a balanced and forward-looking monetary framework, shifting toward inflation-forecast targeting, strengthening the interest-rate channel, and deepening the money market. We have also prioritized financial innovation, digital payments, and consumer protection as integral parts of a resilient and inclusive financial system. Despite the global economic volatility of recent years, our monetary policy has kept inflation within target and supported economic growth — all while scaling up international reserves and promoting a stable exchange rate. The story is not only about technical reforms, but also about institutional momentum, regulatory modernization, and public trust. I invite you to read the full article and reflect on the lessons for other developing economies navigating the delicate balance between stability and innovation. #MonetaryPolicy #FinancialInnovation #CentralBanking #EconomicStability #Kyrgyzstan #DevelopmentEconomics #DigitalFinance

Monetary Policy in Weak States: How Small Open Economies Survive a Fragmented World Over the last 15 years, small open economies convinced themselves that global liquidity would always be there to bail them out. That world is gone. In this new paper, “Monetary Policy in Weak States: How Small Open Economies Survive a Fragmented World,” I look at what higher-for-longer interest rates, sanctions-driven fragmentation, and the rise of digital money (CBDCs, stablecoins, new payment rails) actually mean for countries like Lebanon. These states are price takers in energy, food, capital (i.e., the interest rate they pay when they borrow) and increasingly confidence (i.e., even confidence is becoming something small weak states import from outside. If global markets lose patience with them, the cost of borrowing explodes, deposits leave, and remittances may bypass the banking system no matter what local policymakers say or do); yet they are expected to absorb the same shocks as large advanced economies with far fewer tools. The paper maps how global shocks now travel through four stressed channels (exchange rates, sovereign debt, fragile banking systems, and political risk) and argues that, in this environment, monetary policy in weak states has effectively become a branch of risk management, not a fine-tuning exercise on inflation targets. I then propose a risk-aware framework and a set of priorities for both national authorities and international financial institutions. International Monetary Fund Middleeast and North Africa Financial Action Task Force (MENAFATF) Bank for International Settlements – BIS #MonetaryPolicy #WeakStates #LebanonEconomy #SmallOpenEconomies #HigherForLonger #DigitalMoney #CBDC #FinancialStability #RiskManagement #MENA

🎉 I am pleased to share that my paper titled “Financial Development, Financial Inclusion and the Effectiveness of Monetary Policy Transmission Mechanism on Economic Activities in Africa” has been published in Borsa Istanbul Review (Elsevier).📘 This study explores the intricate relationships among financial institutions, market developments, financial inclusion, and monetary transmission mechanisms across the 54 African countries, providing new insights into how financial structures shape policy outcomes on the continent. 🔍 Key Findings: The interest rate channel exerts the strongest influence on output, while inflation expectations drive price dynamics in Africa. Financial development enhances the efficiency of interest rate and inflation expectation channels, strengthens wealth and collateral effects, and improves credit expansion. Financial inclusion increases the overall efficiency of monetary transmission, particularly through the interest rate, credit, and inflation expectation channels. However, both financial development and inclusion have limited impact on the exchange rate channel, suggesting weak transmission through this pathway. Causality analysis reveals complex two-way and one-way linkages between financial variables and transmission channels, underscoring the interactive dynamics of African financial systems. 💡 Policy Implication: Policymakers should leverage financial development and inclusion to strengthen growth-oriented monetary channels and prioritise effective interest rate management to promote sustainable economic growth across Africa. Grateful to the reviewers whose comments helped to solidify the work. You can read the paper here 👉 https://lnkd.in/eX_FhvQQ #Economics #Finance #FinancialInclusion #MonetaryPolicy #EconomicGrowth #Africa #Research #Elsevier #BorsaIstanbulReview #FinancialDevelopment #FinancialInstitutionDepth #FinancialInstitutionEfficiency #FinancialInstitutionStability #FinancialistitutionAccess #FinancialMarketAccess #FinancialMarketDepth #FinancialMarketEfficiency #FinanncialMarketStability #FinancialMarket #Financialisntitution #MonetaryTransmissionMechanism #Inflation