The Monetary Policy Committee (MPC) of the Bank of Namibia decided to increase the Repo rate by 75 basis points to 5.50 percent from 4.75 after its bi-monthly meeting on the 15th and 16th of August.
Simonis Storm analyst Theo Klein said that the repo rate remains low relative to inflation in Namibia and South Africa, suggesting that monetary policy is accommodative at the moment.
He observes that the repo rate has never been so low compared to inflation in the last 10 years, both in Namibia and South Africa. However, the gap is narrowing as the pace of hikes gain momentum.
‘’This indicates that policy might be deemed restrictive in the near future. Already, market participants are expecting rate cuts in the US and UK by the second half of 2023 (2H2023), implying that South Africa and Namibia could look to cut rates towards the end of next year,’’ he said.
The announcement today follows the South African Reserve Bank’s (SARB’s) decision to hike the rate by 75bps in their July meeting.
At the start of August, the Forward Rate Agreement (FRA) curve factors in about another 100bps hike in South Africa before the end of this year, which would take South Africa’s repo rate from 5.50% to 6.50%.
If this materializes, Klein says that they expect similar movements in Namibia taking place, which implies a prime interest rate of 10.25% in Namibia possibly by the end of the year.
‘’Tight financial conditions for indebted Namibian households and corporates lie ahead as rate hikes are expected to rise further towards the end of this year and during 1H2023. We expect rising interest rates, coupled with high rates of inflation to weigh on consumption spending, a key driver for our economy. However, early estimates indicate that central banks could be cutting policy interest rates as soon as second quarter of 2023. So, there might be some respite for consumers in the near future,’’ he said
According to BoN Deputy Governor Ebson Uanguta the decision was taken to continue safeguarding the peg arrangement and thus anchoring inflation expectations, while meeting the country’s international financial obligations.
Additionally, he said that the decision was taken following a comprehensive review of global, regional and domestic economic developments.
‘’The decision was taken with due consideration of the persistent inflationary pressures and is deemed apropriate to safeguard the one-to-one link between the Namibia Dollar and the South African Rand, while meeting the country’s international financial obligations. Moreover, the adopted monetary policy stance is necessary to narrow the current negative real policy interest rate,’’ he said.
The Deputy governor further noted that this policy stance is further consistent with that taken by central banks around the globe, and in the region, with policymakers acting with resolve to slow and eventually reverse the current acceleration in inflation.
‘’The MPC will continue to monitor these developments and their potential effects on the domestic economy and will act appropriately and in line with its mandate to ensure price stability in the interest of sustainable economic growth and the development of the country. The next meeting of the MPC will be held on the 24th and 25th of October 2022,’’ said Uanguta.
This comes as Inflation accelerated to an average of 5.3 percent during the first seven months of 2022, compared to 3.5 percent in the corresponding period of 2021 and Namibia’s overall inflation is now projected to average around 5.8 percent for 2022, with higher rates in the second half of the year than in the first half.
‘’The acceleration was mainly driven by an increase in the inflation for transport, on account of a rise in international oil prices. On a monthly basis, inflation rose to 6.8 percent in July 2022 from 6 percent registered in June, mainly due to higher inflation for transport and food in the same period,’’ said the Deputy Governor.
In terms of recent economic developments, BoN shared that domestic economic activity increased in the first six months of 2022, with Inflationary pressure remaining elevated and growth in Private Sector Credit Extension (PSCE) accelerating slightly.
Thus, going forward, BoN expects the domestic economy to grow by 3.2 percent this year, mainly driven by the recovery in the mining, electricity, water and tourism sectors.
‘’The performance of the domestic economy continued to improve in the first half of 2022, though output remains below the pre-COVID-19 levels. Year-to-date developments indicate that activity in the domestic economy increased during the first six months of 2022, as reflected in sectors such as mining, agriculture, wholesale and retail trade, transport, communication and tourism,’’ said Uanguta.
According to Uanguta risks to the domestic economic outlook in the medium term continue to be dominated by the impact of the Russia-Ukraine war, global supply chain disruptions and high oil and food prices.
‘’Other risks include climatic swings, animal disease outbreaks within the region, the possible emergence of new COVID-19 variants and other infectious diseases as well as intensified geopolitical tensions,’’ he added.
Since the last MPC meeting, he said, that year-on-year growth in PSCE moderated to 3.4 percent in June 2022 from 3.8 percent recorded in April 2022.
He attributes this moderation to lower demand for short-term asset-backed credit facilities and other loans and advances, specifically by corporates in the energy, mining and commercial services sectors.
‘’Year to date, average growth in PSCE increased to 3.2 percent during the first six months of 2022, higher than the 2.4 percent registered during the same period in 2021, on the back of a rise in demand for credit by businesses,’’ he said.