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BoN opts for 50-basis-point rate hike, drives up debt servicing costs

By November 30, 2022 1947 0
BoN opts for 50-basis-point rate hike, drives up debt servicing costs

The Bank of Namibia (BoN) Governor, Johannes !Gawaxab, said the bank’s decision to increase the Repo rate to 6.75% compared to the South African Reserve Bank’s 7.00% is aimed at containing inflationary pressure and its second-round effect.

This was after the central bank’s Monetary Policy Committee unanimously opted for a 50-basis point Repo rate hike against analyst projections of a 75-basis points increase during its bi-monthly meeting on the 28th and 29th of November 2022 to decide on the appropriate monetary policy stance to be implemented over the next two months.

!Gawaxab said the decision is also deemed appropriate to safeguard the one- to-one link between the Namibia Dollar and the South African Rand.

"Moreover, this monetary policy stance is necessary to narrow the current negative real policy interest rate and is consistent with that taken around the globe, and in the region, with policymakers acting with resolve to slow and eventually reverse the current acceleration in inflation.

The Bank will continue to monitor these developments and their potential effects on the domestic economy and will act appropriately, in line with its mandate to ensure price stability in the interest of sustainable economic growth and development of the country," he said.

FNB Namibia Group Economist Ruusa Nandago said although unexpected, the BoN decision will not have a negative impact on the country’s one-on-one peg with the South African Rand.

“While largely unexpected, BoN currently has room for the small deviation from the SA repo rate. This is because at 4.8 months’ worth of import cover, the stock of international reserves is at a sufficient level to prevent depegging risk. Furthermore, a 25bps deviation is unlikely to trigger significant capital outflows such that the peg comes under threat,” she told The Brief.

Nandago said although not at the same magnitude as the SARB’s Monetary Policy Committee hike of 75 basis points, taking the Repo rate to 7.00%, increasing the prime lending rate to 10.50%, the BoN 50bps increase “is still considered to be large and will result in higher debt servicing costs for individuals and businesses who have taken out debt. However, for savers and investors in the economy, the implication is that they are able to earn higher rates on their savings and investment products”.

“For the ordinary man on the street, the rate hike will result in higher interest payments on any loans they have taken out. For individuals that do not hold debt, the impact might be more indirect through higher cost of goods and services as business costs increase.”

“We expect rate hikes to continue into 2023, however, we believe that the pace and magnitude of the hikes will slow down, in tandem with a slowdown in inflation,” the FNB Namibia Group Economist said.

Simonis Storm Economist Theo Klein forecast a 25bps hike or for the Repo rate to remain unchanged at the next meeting in February 2023.

“We believe a 25bps hike is more likely, as BoN progresses on a gradual reduction in the pace of rate hikes and reaching the end of the local hiking cycle. This expectation seems more likely given that two MPC members at the last meeting were in favour of smaller interest rate hikes and now we see all five MPC members supporting smaller hikes than SARB’s after today’s meeting. We still expect BoN to follow SARB with two 25bps cuts in 3Q2023 and 4Q2023,” he said.

The BoN’s latest announcement comes at a time when the domestic economic activity rebounded during the first 10 months of 2022.

"Domestic economic activity continued to recover, building up positive momentum during the first 10 months of 2022. The recovery was mainly reflected in sectors such as mining, agriculture, transport, communication, tourism as well as wholesale and retail trade.

“On the contrary, activity in the construction sector remained subdued. The economic growth rate for 2022, which was estimated at 3.2 percent in the August Economic Outlook, is currently being revised upwards. This is in the light of more positive information that is accumulating," said the Governor.

 

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Last modified on Wednesday, 30 November 2022 18:05
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