The Bank of Namibia (BoN) is expected to leave its repo rate unchanged at 6.75% on Wednesday, but economists are divided over whether mounting inflationary pressures will force the central bank to resume monetary tightening before the end of the year.
Analysts at FNB Namibia, High Economic Intelligence (HEI) and IJG all expect the Monetary Policy Committee to keep interest rates on hold at its 12 August meeting, following the South African Reserve Bank’s decision to maintain its benchmark repo rate at 7.0%.
The consensus on an August pause, however, masks growing differences over what happens next.
FNB Namibia expects the BoN to raise the repo rate by 25 basis points in October to preserve monetary policy alignment with South Africa and protect the Namibia dollar’s peg to the rand.
“In Namibia, we expect the BoN to keep rates unchanged in August before implementing a 25-basis-point increase in October, maintaining monetary policy alignment with South Africa while safeguarding the currency peg. Based on current conditions, further tightening beyond October appears unlikely unless inflationary pressures intensify materially,” FNB Namibia Economists Cheryl Emvula and Mandisa Van Wyk said.
HEI, however, believes the central bank still has room to keep borrowing costs unchanged, arguing that domestic inflation remains relatively contained despite recent increases.
Headline inflation accelerated to 4.4% in June from 4.1% in May, while core inflation rose to 3.3% from 3.1%. HEI expects inflation to move closer to the 5% mark over the coming months as fuel prices and external cost pressures filter through the economy.
“On balance, the most likely outcome is a hold of the repo rate at 6.75%, allowing previous policy adjustments to continue transmitting through the economy. However, a 25-basis-point hike remains a credible alternative should the Bank of Namibia assess inflation risks as becoming more broad-based, or should fuel and external pressures intensify,” HEI said.
IJG said the South African Reserve Bank’s decision to leave rates unchanged has provided the BoN with greater flexibility by maintaining the current 25-basis-point interest rate differential between Namibia and South Africa.
“The SARB’s decision to keep interest rates unchanged provides the BoN with some flexibility to delay a potential rate hike, while maintaining the existing interest rate differential between Namibia and South Africa,” IJG said.
The policy decision comes as private sector borrowing continues to recover.
Private Sector Credit Extension (PSCE) growth accelerated to 4.5% year-on-year in June from 4.3% in May, with both household and corporate credit expanding at the same pace.
According to IJG, stronger corporate demand for loans and advances, together with renewed growth in instalment finance, leasing and mortgage lending, drove the increase.
External conditions remain a key consideration for policymakers.
Namibia’s merchandise trade deficit widened to N$5.5 billion in June from N$3.2 billion in May, while transport costs, fuel prices, geopolitical tensions in the Middle East and commodity price volatility continue to pose upside risks to inflation.
At the same time, international reserves increased by 1.79% month-on-month to N$56.4 billion in June, providing import cover of 3.5 months, or 3.9 months excluding oil and gas exploration-related imports, according to HEI.
While all three institutions expect the BoN to keep interest rates unchanged this week, the debate has shifted to whether inflation and external pressures will force policymakers to tighten monetary policy later this year.
The divergence in forecasts is therefore not over Wednesday’s decision, but over how long the central bank can afford to keep rates on hold before inflation and regional monetary developments demand another increase.
