The monthly bond on a N$1.2 million house has increased by an average of N$2 590 in the last two years. This is because the domestic home loan interest rate in 2021 was 8.5%, compared to the current 11.75%.  Now, consumers fervently await the latest repo rate increase by the Bank of Namibia (BoN), scheduled for tomorrow, with analysts expecting the rate to reach 7.5% from the current 7%, which is basically in line with the South African repo rate that recently reached 7.75%, taking that country’s prime interest rate up to 11.25%.

Some economic analysts have now started to question the wisdom of using the repo rate to curb inflation as individual borrowing has not actually diminished, instead leaving the average consumer in a deeper financial hole while financial institutions smile ‘all the way to the bank’. This is because consumers pay more on home and car loans every three months as the repo rate skyrockets. This means they are left with less disposable income which in turn forces them to borrow more just to put bread on the table. 

An economist at Simonis Storm, Theo Klein, yesterday said he does not believe BoN’s monetary policy committee (MPC) is in favour of aggressive rate hikes and thus does not see a 50 basis point hike as likely. Klein noted that BoN governor, Johannes !Gawagab, indicated that if monthly inflation data does not move closer to 6%, then a 25 basis point hike is very likely. 

“Inflation was recorded at 6.9% in December 2022, 7% in January and 7.2% in both February and March 2023. So, inflation has been on an inclining trend and moving further away from 6%. We, therefore, believe that a 50 basis point hike will be split over the next two meetings. 

This implies that BoN is likely to hike by 25 basis points at each of their MPC meetings on 19 April and 14 June. This will take the repo rate to 7.50% by end of June 2023 and we believe the repo rate is likely to remain unchanged at that level until the end of the year. The earliest we see BoN cutting interest rates is during the second half of 2024,” said Klein.   

The repo rate is defined as the lending rate offered by a central bank to commercial banks for its short-term funding requirements. The commercial banks then pass on the interest rate levied by the central bank to their consumers through interest charged on loans.  Weighing in, local economist Omu Kakujaha-Matundu said theoretically, a repo rate is a policy tool used by central banks to control rising inflation. But, the crude truth, said Kakujaha-Matundu, is the repo rate has serious distributive consequences. 

BoN increased the repo rate by a cumulative 300 basis points from 3.75% to 6.75% during 2022. The central bank is expected to increase the repo rate from the current 7% to slow down the annual inflation rate that averaged 7.1% in the first three months of 2023.  

“This is making the wealthy wealthier and the struggling masses to endure pain and become poorer. Using a demand side tool to address a supply side disease has never been a good idea. The ‘jam tomorrow’ is an argument used by the elite who decide on those rates. For the common man, it is pain today and pain tomorrow. You basically encourage more borrowing by desperate consumers,” he explained. 

Kakujaha-Matundu added that increasing interest rates is throwing consumers into deeper debt, which at times delivers them into the clutches of loan sharks. 

According to basic economics, the repo rate is a defining factor in determining retail lending rates and regulating inflation. In doing so, the central bank raises the repo rate for commercial banks, resulting in a chain reaction of rising lending rates for customers and the market. 

The school of thought is that as individuals begin to spend less, domestic money supply declines which then pushes down inflation. Similarly, many economists are of the view that reducing the repo rate stimulates expenditure, demand, and consumption of commodities, thus resulting in economic expansion.

Responding to New Era’s questions, BoN’s spokesperson Kazembire Zemburuka said monetary policy works well in the long run, hence people should expect inflation to decline in the medium to long-term. 

“If interest rates rise, the borrowers pay more, but the savers, like pension funds and retired people, receive more interest income,” Zemburuka explained.

According to the central bank, overall consumer price inflation rose from an average of 3.6% in 2021 to an average of 6.1% in 2022, thereby eroding consumers’ purchasing power. 

The elevated inflation in 2022 was predominantly driven by transport inflation. Inflation for transport increased by 10.8 percentage points to 18% on account of high international oil prices aggravated by exchange rate depreciation.

Moreover, prices for food and non-alcoholic beverages as well as water, electricity, gas, and other fuels, increased in 2022, thus contributing to the increase in inflation.

Zemburuka stood firm that the increase in the repo rate is meant to anchor inflation expectations and prevent second-round inflation effects from materialising. 

Indeed, the repo rate increase, he said, helped prevent Namibia’s headline inflation from reaching runaway levels, enabling the country to contain it below the Southern African Development Community (SADC) benchmark of 7%.

“If Namibia did not increase the repo rate, inflation would have been much higher than it is presently and consequently would have had more negative consequences for individuals, especially the poor, who spend a significant proportion of their income on food and basic commodities,” he added.

Meanwhile, growth in private sector credit extended, which is the central bank’s most prominent indicator of borrowing, increased from 2.4% in 2021 to 3.6% during 2022. This, Zemburuka said was due to increased demand for credit by businesses, which increased to 4.6% in 2022 from 1.2% in 2021. Credit extended to households slowed on average to 2.9% growth in 2022 from 3.2% in 2021, partially due to inflation and interest rates. 

“On the other hand, disposable household income rose notably in 2022 compared to 2021. The annual growth in household disposable income rose by 4.4 percentage points to 6.7% in 2022. The main driver that caused the upsurge in household disposable income was the compensation of employees, which increased by 7.2%, following the recovery in areas such as tourism and the approval of a salary increment for government employees in 2022,” explained the BoN spokesperson.

Banking impact 

On the back of elevated interest rates, commercial banks reported significant profits during the past financial year. Analysts believe these profits were achieved due to the increased repo rates hike at the expense of ordinary consumers. This, analysts argue, is because higher interest rates are treated as increased income for banks.

Nedbank Namibia recorded a total income of N$1.2 billion for the year ended 31 December 2022, representing an increase of 13% from the previous financial year, with profit after tax up by 35% to N$275 million.

Capricorn Group Limited achieved solid results with profit after tax for the six months ended 31 December 2022, increasing by 20.3% compared to the prior period. Annualised return on equity also increased to 16.6% (December 2021: 14.9%).

Standard Bank Namibia (SBN) also shook off the adverse impact of Covid-19 in its 2022 year-end results after the bank recorded increased profit for the year of 70.5%, up from N$366 million to N$624 million. This is according to the bank’s annual report for 2022.

According to Frans Uusiku, FNB market research manager, in a report titled ‘Namibia Residential Property Report for the Second Quarter of 2022’, the FNB Residential Property Index published a 12-month average contraction of 2.8% at the end of June 2022, compared to a growth of 4.7% at the end of the prior quarter, and 9.6% over the corresponding period of 2021.

According to Uusiku, the sudden deceleration followed the onset of interest rate hikes in 2022, where the central bank raised rates by cumulative 175 basis points over a period of seven months.

“Nonetheless, overall national house prices have remained fairly stable, with the 12-month national weighted average house price recorded at N$1 173 059 in June 2022, compared to N$1 211 382 in June 2021,” said Uusiku in the report released last year.

Fixed lending rate

During this month at a government information session, deputy director of Macro Models and Monetary Policy at BoN, Postrick Mushendami, said the main aim of an increase in the repo rate is to cause an increase in the cost of borrowing, which results in individuals paying more for loans, including home and car loans. 

Mushendami argued that individuals with fixed lending rates on their liabilities do not feel the pinch of repo rate increases.

“When the repo rate comes down, those in that arrangement are set to lose out, because they are in a fixed regime or interest rate arrangement,” he said.

A fixed interest rate is an unchanging rate charged on a liability, such as a loan or mortgage. It might apply during the entire term of the loan or for just part of the term, but it remains the same throughout a set period.  Mushendami added that with rising rates, individuals and businesses are set to benefit in the long run when inflation starts to decline.

According to him, there is a positive aspect of higher interest rates. The benefit, Mushendami said, is on those holding treasury bills, and those who are saving with the banks during this period as they capitalise on the high interest rate environment. 

He added that any policy intended to combat inflation is for the betterment of the vulnerable. According to him, the peg of the Namibian Dollar to the South African Rand has an important consideration to the domestic monetary decision.  

“There is also a need for countries in the Common Monetary Area (CMA) to have aligned interest rates. Within the CMA there is a need for interest rates to be aligned, but the alignment does not mean to be the same but rather the deviation should not be big,” he explained. 

The CMA links South Africa, Namibia, Lesotho and Eswatini into a monetary union. The main purpose of this trade is that all of the parties can have the same development and equitable economic advancement to be treated as one monetary unit. - mndjavera@nepc.com.na, - ebrandt@nepc.com.na