The South African Reserve Bank’s (SARB) Monetary Policy Committee voted on Thursday to raise interest rates by 50 basis points (bps), contrary to market expectations.
Simonis Storm Economist Theo Klein says the development now means Namibia’s repo rate at 7.00%, is now 75bps behind the repo rate in South Africa which is at 7.75%.
“We expected the SARB to hike by 25bps only, so the 50bps was certainly a surprise. The Forward Rate Agreement (FRA) curve is now factoring in another 25bps repo rate hike in South Africa in May 2023 with an 80% probability,” he said.
According to Klein, this comes as the Bank of Namibia has previously deviated from South Africa’s repo rate in the past.
“The largest deviation between the two repo rates was 150bps between June 2008 and February 2009, but the longest period of deviation was during March 2010 to December 2013 (46 months in total),” he said.
Based on this, he does not expect the Bank of Namibia to not blindly follow SARB and so it is possible that they only hike by 25bps at their next meeting on 19 April 2023.
“Supporting our view is the fact that the governor did mention if monthly inflation rates do not move closer to 6% then another 25bps hike seems likely.”
Meanwhile, the SARB increased its inflation forecast from 5.5% to 5.9% for 2023, citing that “inflation is expected to be broader based due to wage settlements, effects of load shedding and a weaker Rand exchange rate.”
Klein said the cost of renewable energy investments and running generators will likely be passed on to consumers and raise inflationary pressures further which will filter through to Namibia.
“These inflationary pressures are likely to filter through to Namibia as well. We, therefore, see upside risks to inflation increasing and this could prompt the Bank of Namibia to hike in April 2023,” he said.
The SRB rate hike to 7.75% and pushed the country’s prime lending rate to 11.25%.
The latest rate hike marks the ninth hike in the current cycle, with the total adjustment being 425 basis points since the hike cycle started in November 2021.
Rates are now at their highest point in 13 years (June 2009), when the fallout from the global financial crisis weighed on the local currency.
According to Reserve Bank Governor Lesetja Kganyago, the hike comes on the back of a persistently high inflationary environment, alongside troubles for both local and global economic growth.
The South African economy is reported to have contracted by 1.3% in the fourth quarter of 2022, considerably worse than the SARB had anticipated back in January.
This was due to the persistent load-shedding over the period, Kganyago said.
