WINDHOEK
The Bank of Namibia’s (BoN) Monetary Policy Committee (MPC) met yesterday to decide on interest rates and we expect them to leave the repo rate unchanged at 7 percent, in line with the South African Reserve Bank’s (SARB) MPC decision to leave their repo rate unchanged at 7 percent after its July 21 meeting.
The rand’s depreciation was assessed as one the biggest upside risks to South Africa’s inflation outlook during the first half of this year.
Therefore, the decision by the SARB to leave interest rates unchanged was largely due to the recent rand strength, which reduced some risks to the inflation outlook.
While inflation in Namibia accelerated to 7 percent in July as a result of surging food prices and higher administered prices we expect near-term inflationary relief on the back of a strengthening currency and slipping commodity prices, particularly Brent crude oil.
Growth in private sector credit extension has been moderating due to slower growth in credit extended to both corporates and households.
We expect this downward trend to continue on account of the tightening monetary policy cycle and more cautious lending practices, providing BoN with some leeway to stand pat for now.
The BoN was aiming to tame growth in household credit, in particular instalment credit, and ‘unproductive’ vehicle sales growth.
Furthermore, the current interest rate hiking cycle has largely been in response to the SARB’s tightening cycle, in a bid to align interest rates with that of South Africa. The weak economic backdrop in South Africa heavily influenced the SARB decision to keep interest rates unchanged.
The SARB has the dreaded task of having to contend with rising inflation in a low growth environment, which is known as “stagflation”, or the proverbial being stuck between rock and a hard place of monetary policy. The SARB noted that “the assessment of the balance of risks to the inflation outlook and the weak domestic economy provided some room to delay further tightening of the monetary policy for now”.
While it might be too soon to call an end to the current hiking cycle, our view is that we are close to the peak in interest rates in both Namibia and South Africa. This means that over the next 12 months we expect only two more 25 basis point (0.25 percent) interest rate increases, taking the repo and prime rates to 7.50 percent and 11.25 percent, respectively.
We believe that the two hikes will be in reaction to currency weakness in the event of an interest rate hike by the Federal Reserve (Fed) in the United States and South Africa’s sovereign credit rating being downgraded to sub-investment grade.
Should the Fed opt not to hike and South Africa avoids a credit ratings downgrade, we don’t expect the SARB, or BoN, to move on interest rates – inflation notwithstanding.
* Suta Kavari is an investment strategist at Capricorn Asset Management, part of the Bank Windhoek Holdings Group.