Interest rates are surging, who should celebrate?

Inflation is high, and interest rates have soared. How much further Bank of Namibia (BON) needs to raise interest rates, and whether the economy can prosper as it raises it, are crucial questions without clear answers. 

The debate amongst the masses regarding BON’s domestic interest rates changes gained momentum for the past COVID years to date. 

What will domestic interest rates do this year? It is a question we ask ourselves at the beginning of every year which, after BON has increased its repo rate to 7%, does not require much crystal ball gazing or a Sangoma consultation. 

It has become abundantly clear that BON is taking notes from South African Reserve Bank and following its gameplan in making decisions regarding the course of our local interest rates. Thus, anchoring inflation expectations and safeguarding the Rand pegging arrangement plays the biggest role in our monetary policy. 

When BON increased the Repo rate to 7%, the decision was expected. It signaled that tightening would continue at a higher level than markets had anticipated. Annually, inflation rates continue to surge along with the above soaring interest rates. According to BON’s monetary policy statement, Namibia’s average inflation rose to 6.1% during 2022 compared to 3.6% in 2021. 

It remained elevated at 7% during January 2023 compared to 6.9% in December 2022. On that note, the rate is expected to decline to an average of 5.3%.  But the path of inflation is not certain, this means further tightening is still needed to make sure the rate of inflation does not soar badly. 

While some market participants are predicting reductions in inflation rates sooner, saving rates still are not keeping up with the prices we are paying. Some experts strongly believe that we will still witness higher rates by the end of 2023 with expectation of a slowdown in 2024 only. 

The ideology behind increasing Interest rates is normally associated with combating the high inflation and simultaneously improving the living cost. Nevertheless, it is not time to start celebrating yet, as Interest rates highly affect the cost of credit, making it relatively expensive to borrow money. 

One way or another, we have borrowed money or have an intention to borrow money to supplement our income for purchasing necessities such as housing. Thus, for consumers with a borrowing appetite, it makes borrowing more costly and any attempt to pay off these borrowings quicker is consumed by the increase in the interest rate. There by prolonging the paying off period and trapping you further deep in debts. 

Interest rate increase seems to fail in all attempts to arrest the inflation. This may be because our current inflation regime is dictated by cost push rather than the law of supply and demand as narrated by economic theory. 

Even though the interest-rate landscape has vastly improved since last year in our favour, an ordinary Namibian who wish to invest his/her money for a while, and try to keep up with inflation, cannot celebrate yet, as real interest return is consumed up by high inflation. 

Also, the proportion to which interest rates are increasing, manifested in mortgage bond surges is not supplemented by household income increments. An unfair effect on the “households” players in the market. 

Our condition is not unique and peculiar to us. On the global side, growth slowed during 2022 predominantly on the back of fiscal and monetary tightening, higher base effects from the post-COVID reopening boost, China’s ongoing COVID-zero restrictions and property slump, and the Russia-Ukraine war.  

Despite these developments, underlying fundamentals in both the United States and Euro Zone economies have held up.  Whilst the US grew below trend in the past year, they are likely to avoid a recession, or experience a shallow one, as incoming activity data indicators and the labour market are reasonably healthy.  

Last year, Federal Reserve Chairman Jerome Powell anticipated interest rates to level up within a few months after further rate hikes, and that the rate of such hikes should slow down. He ruled out any cuts in 2023 and said the Fed will only start reducing interest rates when it is confident inflation is moving towards 2%. 

A plausible conclusion to draw from this, was that the Fed will raise rates this year. Thus, we have seen the Fed raised the target range for the fed funds rate by 25 bps to 4.75% in its February 2023 meeting, dialing back the size of the increase for a second straight meeting, but still pushing borrowing costs to the highest since 2007. 

The market welcomed the hikes by BON, therefore, whether it is Consumers, Producers, Borrowers and/or Savers- the extend to who should celebrate remain critical, given that inflation and interest rates are currently driving a positive relationship as if it was ceremonized in a church. 

At some point, we will get through this and celebrate, when a variety of interest rates is higher than the rate of inflation. Until then, buckle up. 

*Trophy Shapange is a Managing Director at Hangala Capital Investment Management and can be reached at trophy@hangalacapital.com 

Opinion expressed in this piece is of the writer and not that of his employer.

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