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I came to view the process by which a central bank manages the interbank rate in a different light a few years ago in a paper on the zero bound on interest rate policy. 8 Obviously, at the zero bound it is no longer possible for a central bank to operate on the interest opportunity cost spread. The spread is zero. Nevertheless, a central bank still may be said to manage the interbank rate when it is zero. Thus, something other than open market operations and the interest opportunity cost spread must matter for the implementation of interest rate policy. Irving. | BANK Of ZAMBIA SURVEY ON HOW COMMERCIAL BANKS DETERMINE LENDING INTEREST RATES IN ZAMBIA September 2010 1 1.0 Introduction 1.1 As Government has indicated its intention to shift monetary policy away from monetary targeting towards interest rate targeting the Bank of Zambia BoZ has embarked on conducting preliminary research to assess the feasibility of an interest rate targeting framework in Zambia. Gaining a thorough understanding of the interest rate decision-making process undertaken by commercial banks in Zambia would not only assist in the determination of an appropriate policy rate but would also enable the Bank of Zambia to ascertain the transmission channel through which the policy rate would be most effective. 1.2 Evidence from numerous interest rate targeting central banks indicates that the policy rate should be aimed at influencing developments in the interbank rate which is then expected to affect borrowing costs along the yield curve. The interbank market is therefore expected to play a crucial role in the implementation of the interest rate targeting framework. 1.3 Investigating why the lending rates are high was also an area of great policy interest. 1.4 The main objective of the survey was therefore to identify the factors both quantitative and qualitative that commercial banks consider in making decisions regarding their base lending rates. The specific objectives were twofold a Assess to what extent the interbank market influenced the cost of funds in the interest rate determination process and b Ascertain which factors have significantly contributed to the high level of lending interest rates currently prevailing in the market. 1.5 The key question posed to commercial banks was What factors do you take into consideration when determining the base lending rate for Kwacha Foreign currency loans A formal model of the calculation method for determining the base rate was also requested as well as the minutes from Assets and Liabilities Committee ALCO
