The Bank of Namibia (BoN) unexpectedly cut its benchmark interest rate by 25 basis point from 7.75% to 7.50% on Wednesday, marking the first change since June 2023.
The BoN Monetary Policy Committee’s (MPC) decision defied analyst expectations, who had widely predicted that the central bank would maintain the rate at 7.75%.
BoN Governor Johannes !Gawaxab said commercial banks are accordingly expected to reduce their lending rates by 25 basis points and to speedily transmit the interest relief to borrowers.
“The banks’ prime lending rate will therefore decline from 11.50% to 11.25%. This policy stance will continue to support domestic economic activity and safeguard the one-to-one link between the Namibia Dollar and the South African Rand supported by the adequate stock of international reserves,” he said.
He further noted that the MPC is of the view that as the monetary policy easing cycle progresses, the margin between the repo rates of the Bank of Namibia and the South African Reserve Bank will again narrow.
This comes as domestic economic activity rose during the first half of 2024 relative to the same period in 2023; however, growth is expected to slow in 2024.
“While the increase in economic activity during the first half of the year was broad-based, it primarily emanated from the mining, electricity generation, wholesale and retail trade, tourism, communication and transport sectors as well as the livestock marketing subsector,” he said.
Looking ahead, the Governor noted that growth in Namibia’s real gross domestic product is projected to decelerate to 3.1% in 2024 from 4.2% in 2023.
“This revised projected growth is 0.6% age points lower than the forecast at the previous MPC meeting. The slower growth is anticipated to be mainly driven by a slowdown in the primary industry, partly reflecting the prevailing drought conditions,” he said.
Meanwhile, external risks to the domestic economy include unduly tight global monetary policies, disruptive geopolitical tensions and conflicts as well as geoeconomic fragmentation.
“Mounting unfavourable developments in the international natural diamond market present an additional adverse external risk to domestic growth. Internal risks remain the persistent drought conditions and water supply interruptions, particularly at the coastal towns,” he said.
On a positive note, BoN revealed that domestic inflationary pressures have continued to ease year-to-date.
On average, inflation slowed to 4.8 % during the first seven months of 2024, from 6.2% recorded during the same period in 2023.
“The disinflation continued to be primarily driven by relatively lower average food inflation. Since the last MPC meeting, inflation eased from 4.9% in May to 4.6% in both June and July 2024, mainly reflected in the categories of alcoholic beverages and tobacco and transport,” he said.
Going forward, the forecasts of average inflation for 2024 and 2025 have been revised downwards to 4.7% and 4.4%, respectively, compared to previous projections of 4.9% and 4.5%.
“The downward revision to the inflation forecast is attributed to the appreciation of the Namibia Dollar and the moderation in crude oil prices,” he said.
Since the previous MPC meeting in June, !Gawaxab noted that annual growth in PSCE has exhibited some volatility while remaining subdued.
“PSCE growth rose from 1.6% in April 2024 to 3.2% in May 2024 before falling to 1.8% in June 2024. Meanwhile, the growth in PSCE slowed to 2.0% during the first half of 2024, compared to 2.8% recorded in the corresponding period in 2023,” he noted.
Overall, PSCE growth continues to be restrained by tight lending conditions, amid eroded real incomes and a restrictive monetary policy.
This comes as analysts from IJG Securities, FirstRand Namibia and Simonis Storm expected the BoN to maintain its repo rate at 7.75% during the recent Monetary Policy Committee meeting, marking a third consecutive hold.
This expectation stemmed from a stable inflation rate of 4.6%, a favourable interest rate differential with South Africa, and healthy international reserves.
Analysts also noted that while future rate cuts were anticipated in December 2024, current conditions, including potential inflationary pressures from adverse weather and supply chain issues, supported keeping the rate steady to ensure economic stability and manage inflation effectively.
