Businesses and households are expected to remain cautious about borrowing after the Bank of Namibia raised the repo rate to 6.75%, with higher interest rates likely to slow credit growth for the rest of the year, according to First National Bank (FNB) Namibia.
In its latest Private Sector Credit Extension (PSCE) Report, FNB said the central bank’s decision to increase the repo rate by 25 basis points in June will keep borrowing costs elevated, discouraging new loans despite resilience in some areas of the economy.
The Bank of Namibia raised the repo rate on 17 June to narrow the interest rate gap with South Africa and protect the Namibia dollar’s peg to the South African rand.
FNB said the higher interest rate environment is expected to encourage businesses to preserve cash and strengthen their balance sheets rather than invest or expand.
“While the Committee acknowledged weak economic activity and subdued PSCE growth, the hike was mainly aimed at containing inflation risks and limiting second-round effects from recent energy shocks,” the report said.
“For PSCE, this implies that credit growth is likely to remain muted, as higher borrowing costs continue to weigh on household and business demand, limiting appetite for new borrowing. However, with reserves still comfortable and domestic demand weak, we do not expect further hikes for the remainder of the year.”
Private sector credit growth slowed to 4.3% year-on-year in May from 4.8% in April, mainly because companies borrowed less.
Corporate credit growth eased to 4.4% from 5.5% as businesses reduced overdrafts and repaid short-term loans, particularly in the mining, manufacturing and telecommunications sectors, ahead of the expected interest rate increase.
Household borrowing remained relatively stable at 4.2%, supported by continued demand for overdrafts and vehicle finance despite rising living costs and higher interest rates.
FNB said many households continue to rely on short-term borrowing to manage day-to-day financial pressures.
Mortgage lending also improved slightly, while instalment sale and leasing finance remained the fastest-growing category of credit, driven largely by vehicle purchases.
Vehicle sales increased 14.8% year-on-year in May, supporting demand for asset-backed lending.
“At the same time, instalment sale and leasing credit remained solid, although it eased marginally to 14.6% year-on-year in May from 14.8% a month earlier. Mortgage credit remained firm at 1.9% year-on-year, while growth in other loans and advances slowed to 5.3% from 5.8%, reflecting weaker household demand,” the report said.
Meanwhile, inflation accelerated to 4.1% in May from 3.0% in April, mainly due to higher transport costs following fuel price increases and higher taxi fares.
Although inflation is expected to ease in the coming months, FNB warned that the decline is likely to be gradual.
“Any potential easing in inflation is likely to be gradual, as changes in fuel prices typically take time to feed through the broader economy. Consequently, borrowing conditions are expected to remain tight until a more sustained moderation in inflationary pressures materialises,” the report said.
