Tumelo Thudinyane
Daniella Ferreira
The upcoming Bank of Namibia Monetary Policy Committee announcement scheduled for 14 June 2023 will be very significant as it will provide insights into the direction of the country’s monetary policy. The Bank of Namibia’s tone at its previous interest rate announcement was largely unchanged from its previous stance – hawkish but largely data dependent.
Namibia is currently in its sixth interest rate hiking cycle since 1991. Relative to the previous hiking cycles, the current cycle is the third most aggressive in terms of the total cumulative basis points by which the Bank of Namibia (BON) increased interest rates. The Bank of Namibia has hiked its repo rate by 350 basis points in the past 18 months since 31 January 2022.
These moves have been what the BON considered the most appropriate monetary policy stance, to continue anchoring inflation and safeguarding the one-to-one link/peg arrangement with the South African Rand. There is no certainty as to when the current hiking cycle will end. However, the market is of the view that there will be one or two more interest rate hikes before a peak is reached and the central bank ceases with the interest rate hikes.
In terms of the key interest rate differential between Namibia and South Africa, BON has deviated from South African monetary policy and as such Namibia now has a 100-basis point differential under South Africa’s key policy rate of 8.25%. Typically, the BON maintains a 25-basis point buffer above the South African repo rate.
Naturally, money flows where interest rates are higher and where there are higher interest-bearing financial instruments. The current repo rate differential below South Africa’s repo rate may come at a cost to the economy in terms of investments and further capital flows from Namibia to South Africa, which typically become noticeable and more pronounced at a 75-basis point differential in terms of capital flows either in or out of the country.
The BON’s current assessment is that risks to the inflationary outlook remain particularly skewed to the upside, with the BON’s baseline estimates suggesting that inflation will average 6.1% and 4.3% in 2023 and 2024 respectively. The main risk sentiments in this regard emanate from the prolonged stubbornness in core inflation and second-round effects on food price inflation emanating from a weaker exchange rate.
The BON projects Namibia’s economic growth performance to slow down during 2023 and 2024, due to weaker global demand. Real GDP estimates have moderated downwards to 3% and 2.9% in 2023 and 2024 respectively, with the main risks to domestic growth being monetary policy tightening globally, reduced spending powers of consumers the high costs of key import items – amid the backdrop of a weaker exchange rate.
*Tumelo Thudinyane is Assistant Portfolio Manager and Daniella Ferreira is a
Junior Investment Analyst, both at Old Mutual Namibia.