Commercial banks have commenced with a reduction of their interest rates after the Bank of Namibia’s Monetary Policy Committee (MPC) on Wednesday cut the repo rate even further by 100 basis points to 4.25% in a bid to provide more relief for consumers. At its new level, the repo rate is expected to provide some short-term relief to borrowers.
The MPC decided to support weak domestic economic activity and provide short-term relief amid the extraordinary circumstances arising from the Covid-19 pandemic and the central bank noted that this stance will not compromise the one-to-one link between the Namibian Dollar and the South African Rand.
By yesterday, Bank Windhoek confirmed the reduction of its Prime Lending Rate by 1.00% from 9.00% to 8.00% while its Mortgage Lending Rate will decrease from 10.00% to 9.00% from Tuesday, 21 April 2020.
According to Diederik Kruger, Bank Windhoek’s Head of Funding and Liquidity Management, the monetary action is necessary to support households and businesses operating during these challenging and uncertain times. He noted that the economic impact on Namibia’s small economy needs to be mitigated, and the repo rate reduction is just one intervention from the regulator to assist banks in helping their clients. Kruger stated that during times of great uncertainty, bold moves are necessary to help protect vulnerable households and industries.
“This is certainly a worldwide economic crisis that has not been witnessed before. With interest rates at historical lows, Bank Windhoek encourages our clients to honour their financial obligations to cushion the impact of the Covid-19 pandemic on their budgets,” Kruger said. Since its last extraordinary MPC, the Bank of Namibia (BoN) has noted positive developments aimed at cushioning the economy from the effects of the pandemic.
“The Bank, in its role as the regulator of commercial banks, has undertaken policy and regulatory changes to allow commercial banks the necessary space to help individuals and businesses during this extraordinary time. These efforts together with Government’s recently announced stimulus package are believed to help mitigate the impact of COVID-19 on vulnerable sectors, people’s livelihood and on the economy,” explained BoN’s Deputy Governor, Ebson Uanguta.
The Deputy Governor also confirmed that domestic economic activity slowed during the first three months of 2020. The inflation rate declined, while the growth in Private Sector Credit Extension (PSCE) remained subdued. The stock of international reserves remained sufficient to support the currency peg.
“The slowdown in growth was mainly reflected in declining economic activity in sectors such as mining, wholesale and retail trade, manufacturing, as well as tourism, with especially tourism arrivals falling back sharply. Activity in other sectors such as transport and storage, however, continue to record positive growth during the first two months of 2020. Preliminary estimates indicate that the domestic economy will contract significantly in 2020,” Uanguta stated. Similarly, global economic activity is also projected to contract significantly in 2020 mainly on account of the Covid-19 pandemic. “Since the previous MPC meeting, inflation rates in most key monitored economies declined, while monetary policy stances became even more accommodative, Uanguta noted.
The global economy is projected to contract by 3.0% in 2020, much worse than the 0.1% decline during the 2008/2009 global financial crisis. The projected contraction is mainly on the back of the Covid-19 pandemic which has caused severe economic disruptions. In the Advanced Economies (AEs), growth is projected to contract by 6.1% in 2020, while the Emerging Markets and Developing Economies (EMDEs) are projected to contract by 1.0% in 2020. Key risks to the global outlook remain and include uncertainty regarding the pandemic and the extent of supply disruptions.
Said Uanguta: “Commodity and capital markets remained volatile due to the effects of uncertainty surrounding the Covid-19 pandemic. All monitored commodity prices remained weak as a result of lower demand from major economies such as China, except for gold which rallied due to safe-haven demand. Brent crude oil prices declined significantly, reflecting the effects of excess oil supply coupled with subdued demand. This could bring some relief to importers such as Namibia. Given low energy and food prices environment, inflation generally declined across most monitored economies. Exchange rates, and in particular those of the EMDEs, depreciated significantly”.
Since the previous MPC meeting, inflation in key monitored economies declined while most central banks in both the AES and EMDEs have adopted accommodative monetary policies by cutting interest rates during March and April 2020.
More on the domestic front, annual average inflation for the first three months of 2020 declined further to 2.4% from 4.5% in 2019. This is mainly on account of a decline in all three top categories, namely food and non-alcoholic beverages, housing and transport inflation. Going forward, overall inflation is projected to average below 3.0% in 2020.
Average growth in Private Sector Credit Extension (PSCE) remained subdued at 6.7% during the first two months of 2020, reflected in credit extended to both businesses and households. Since the previous MPC meeting, the annual growth in PSCE declined further to 6.1% at the end of February 2020, from 7.2% in December 2019 as reported in the previous MPC statement.
As of 31 March 2020, Namibia’s stock of international reserves stood at N$33 billion, from N$32.2 billion reported in the previous MPC statement. This amount of international reserves is estimated to cover 5.3 months of imports of goods and services and at this level, reserves are sufficient to protect the peg of the Namibia Dollar to the Rand.