The Monetary Policy Committee (MPC) of the Bank of Namibia has decided to keep the Repo Rate unchanged at 3.75%. The Repo rate is the rate at which commercial banks borrow from the central bank and this, in turn, determines interest rates for consumers.
The governor of the bank, Johannes !Gawaxab, yesterday stated that the MPC is of the view that the Repo Rate is still appropriate to support domestic economic activities while at the same time safeguarding the one-to-one link between the Namibian Dollar and the South African Rand.
Minister of Finance, Ipumbu Shiimi, this week said the monetary policy remained relatively neutral over 2019 and highly accommodative during the first half of 2020.
The repo rate was cut by a cumulative 275 basis points since March 2020, from 6.50% to 3.75% by mid-August 2020.
Some of the measures government has put in place during the Covid-19 pandemic include the cutting of repo rates to provide some short-term relief to borrowers. However, the question remains whether such cutting is an effective tool to stimulate economic activity.
“This is the lowest policy rate in recent memory and it was provided as part of the measures to encourage domestic economic activity during the pandemic while supporting the currency peg. This has also enabled commercial banks to extend relief to clients hard-hit by the pandemic,” explained Shiimi.
According to Postrick Mushendami, Deputy Director of Macro Models and Financial Stability at the Bank of Namibia, the previous reductions of the repo rate has been effective as Namibia has not seen a lot of closures by the commercial sector. Mushendami added that interest rates take time to affect real output.
“Normally, the transmission between interest rates to the real economy takes a minimum of 18 to 24 months. So, we should wait for that period to before we start criticising the effect of repo rates,” Mushendami asked.
In clarification, he said, interest rates alone cannot be an answer because they deal with demand management but what has been seen in terms of the domestic economy is shocks to both demand and supply.
The central bank governor yesterday also stated that the cut has been effective especially in providing some respite for households that had instalments to settle, especially in making the cost of funding available as a mandate of the central bank.
!Gawaxab added that domestic economic activity slowed during the first eight months of 2020, compared to the same period in 2019. He said activities in the telecommunication and local electricity generation subsectors improved during the same period.
Going forward the domestic economy is projected to contract by 7.8% in 2020, before a moderate recovery of 2.1% in 2021.
Meanwhile, annual average inflation declined to 2.2% during the first nine months of 2020 compared to 4.2% in the corresponding period of 2019. The governor said the lower inflation was mainly due to the decline in transport, housing and food inflation.
On a monthly basis, the inflation rate increased to 2.4% in both August and September 2020, from 2.1% in July 2020. Overall inflation is projected to average 2.3% in 2020.