Higher credit cost still haunts consumers…as BoN raises repo rate

Home National Higher credit cost still haunts consumers…as BoN raises repo rate

Consumers have to keep on tightening their belts, just as they have been doing for the last couple of years due to the severe impact of the Covid-19 pandemic on living costs, coupled with a persistent recession. Now, consumers have to reduce their spending even more after the Bank of Namibia yesterday increased the repo rate again, this time with 25 basis points from 6.75% to 7%. 

The repo rate is the level at which commercial banks borrow money from the central bank, and in turn determines interest rates for consumers.

The increase pours more misery on Namibian consumers, many of whom rely on debt to survive. This is after many Namibians lost their jobs due to Covid-19, and a significant number of people had their employment hours reduced. These factors have basically made living costs unbearable, as many Namibians are forced to turn to debt for survival. This has resulted in many turning to credit, which has sadly become a part of life as consumers just cannot make ends meet.

The increase in the repo rate effectively brings the prime lending rate at commercial banks to 10.75%. 

While announcing the rate increase yesterday, BoN governor Johannes !Gawaxab said the monetary policy committee (MPC) reinforced the view that the increase is appropriate to safeguard the one-to-one link between the Namibia Dollar and the South African Rand, and to continue anchoring inflation expectations.

“The decision was taken to contain inflationary pressure and its second-round effects, and anchor inflation expectation,” said the governor.

!Gawaxab noted that domestic economic activity has continued to show a gradual improvement. The expansion has been broad-based, mainly observed in sectors such as mining, agriculture, transport, wholesale and retail trade, tourism and communication. However, activity in the construction sector continues to decline as both government and private sector work remain subdued. 

Going forward, real gross domestic product (GDP) growth is estimated to amount to 3.9% in 2022, and is forecast to slow down to 2.7% in 2023, taking the level of activity beyond that observed before the pandemic.

The central bank governor reiterated that risks to the domestic economy include the weakening global economic activity, the tightening of monetary policy globally, high inflation, and global supply chain disruptions. Additional risks include water supply interruptions, climatic swings and localised flooding.

Meanwhile, Namibia’s average inflation rose to 6.1% during 2022, compared to 3.6% in 2021. The rise in inflation continued to be predominantly driven by transport inflation, on account of high international oil prices. 

“On a monthly basis, overall inflation remained elevated at 7% during January 2023, compared to 6.9% in December 2022. Namibia’s overall inflation for 2023, however, is expected to decline to an average of 5.3%,” continued !Gawaxab.

Weighing in on yesterday’s rate increase, head of research at High Economic Intelligence, Salomo Hei, said “we are between a rock and a hard place”.

“Inflation came in slightly higher than market expectations, but the repo rate is anchored within market expectations. We anticipate the interest rate hike cycle until the second quarter, but there’s risk on the inflation side because a second-round effect of demand could further induce inflation,” he added.

Furthermore, the High Economic Intelligence 2023 economic outlook anticipates inflation to slow down in 2023, compared to 2022, as cost-push factors stabilise, particularly in the food & non-alcoholic beverages and housing segments. It further expects the transport basket to stabilise in line with the underlying commodity, with upside risk being the depreciating rand.

“Risks to domestic growth are predominantly in the form of monetary policy tightening around the world to contain inflation. Furthermore, with the uncertainty of the Russia-Ukraine conflict likely to not end soon, high prices are expected to remain for affected commodities, for which Namibia is a net importer. 

Other risks include water supply interruptions, potential spill-over effects of electricity cuts from South Africa to Namibia, and uncertainties about the effects of climate change, going forward,” reads the report.