An analysis conducted by the Bank of Namibia shows that a lower inflation target of 3% in South Africa will lead to low and stable long-term inflation in Namibia, which is beneficial for price stability. The Bank of Namibia states that the eventual decline in inflation is expected to cause a reduction in interest rates in the medium term.
South Africa adjusted its inflation target on 12 November 2025, reducing it from the previous 3% to 6% to 3% with a 1% tolerance band. This change will consequently affect Namibia as a member of the Common Monetary Area (CMA).
The lower inflation target set by South Africa is expected to, among other things, lead to lower inflation and a reduction in interest rates in South Africa over the medium to long term.
Mindful of the envisaged benefits of the lower inflation target, the Bank of Namibia has welcomed South Africa’s new target, stating this could enhance welfare and macroeconomic stability for Namibia.
The new inflation targets are even more relevant for Namibia, considering it imports billions of dollars worth of goods from South Africa annually, thereby importing much of that country’s inflation.
“By committing to tighter price stability, the new target will help entrench disinflationary discipline across the economy, reduce long-term borrowing costs, and strengthen investor confidence over the medium to long-term. Over time, a firmly anchored inflation environment narrows the gap between nominal and real interest rates, creating space for sustainable lower inflation outcomes. This, in turn, supports household purchasing power, eases financing conditions for firms, and reinforces the foundation for stronger, more durable economic growth,” said Bank of Namibia governor, Johannes !Gawaxab.
Meanwhile, the central bank elaborated that Namibia, along with South Africa, Eswatini, and Lesotho, is a member of the CMA, where the currencies of smaller members are all pegged 1-to-1 to the South African Rand. Simultaneously, the Rand is a legal tender in Namibia alongside the Namibia Dollar.
The CMA agreement further mandates Namibia to ensure that international reserves fully back every Namibian dollar in circulation.
“In this context, CMA members should align monetary variables, such as interest rates, with those of South Africa to prevent significant capital outflows in search of higher returns in South Africa, given the free movement of capital within the area. Consequently, the smaller CMA countries, including Namibia, are required to align their monetary policies with the anchor economy,” explained Bank of Namibia spokesperson, Kazembire Zemburuka.
Zemburuka added that despite this constraint, periodic reviews conducted by the Bank of Namibia indicate the benefits of Namibia’s membership in the CMA continue to outweigh the costs.
These benefits include price stability as evidenced by low and stable inflation rates prevailing in the country; Elimination of transaction costs and exchange rate risks in intra-CMA trade; Access to deeper financial markets, either in South Africa or through South Africa to other larger markets, and finally; the loss of seignorage, which is the revenue foregone due to the co-circulation of the Rand in the Namibian economy, that is offset by a compensation arrangement.
“While the lowered inflation target holds immense benefits for Namibia, the Bank of Namibia has noted that the relatively high proportion of administered prices in Namibia’s inflation basket may limit the country from fully reaping the benefits of the envisaged lower inflation target set by South Africa,” Zemburuka stated.
However, the Bank of Namibia has committed to continuing to engage with relevant stakeholders involved in price and wage-setting to consider the implications of wages and administered prices on inflation, to ensure Namibia’s price and monetary stability is promoted effectively.
-ebrandt@nepc.com.na