𝐁𝐚𝐧𝐤 𝐨𝐟 𝐍𝐚𝐦𝐢𝐛𝐢𝐚 𝐏𝐫𝐨𝐯𝐢𝐝𝐞𝐬 𝐌𝐮𝐜𝐡-𝐍𝐞𝐞𝐝𝐞𝐝 𝐑𝐞𝐥𝐢𝐞𝐟
Last week, the Bank of Namibia (BoN) opted to cut their repo rate by 0.25% to 7.50%. This was the first rate cut in more than 2 years and followed after 6 consecutive monetary policy committee meetings where rates were left unchanged each time. Subsequently, commercial banks are expected to also reduce their prime lending rates from 11.50% to 11.25%, of which some have already done so.
Of course, this announcement was a welcome relief to many businesses and households alike who have been under severe pressure over the last few years due to the high interest rates. Post Covid, interest rates in Namibia increased in total by 4% during 2022 and 2023, thereby absorbing much of the disposable income from the market. This lower spending ability had significant adverse effects on households and businesses, which filtered through to the broader economy.
In his press release, the Bank of Namibia's governor, Mr Johannes Gawaxab!, made it clear that although BoN is well aware of the strain many Namibians are facing, they remain determined to honour their mandate of keeping inflation under control and to protect our currency peg with the SA Rand. The market strongly expects the South African Reserve Bank (SARB) to also reduce their repo rate by 0.25% at their upcoming meeting in September. In terms of inflation, it is expected that Namibia's inflation, currently at 4.6%, will decrease over the next few months to 4% towards the end of the year.
The overwhelming sentiment in the market was for the Federal Reserve Bank of America (Fed) to be first in line to cut at their upcoming meeting in September and for the SARB to follow suit shortly thereafter. The danger of cutting too early is that our inflation could flare up again on the back of increased consumer spending, thereby forcing the BoN to raise interest rates again, only to dampen inflation. The chances of this are slim, with inflation levels contained, credit growth is very much subdued and more importantly, future inflation also appears lower. It is better to administer the necessary medicine for a faltering economy earlier than to wait unnecessarily only for the economy to grow weaker.
The expectation is that Namibia's economic growth will drop to 3.1% for 2024, so kudos to BoN for recognising this and taking a rather bold step to cut rates against market consensus. Bear in mind the overall expectation is that interest rates will decrease by another 1% over the next 12 months, so this reduction, albeit earlier than most expected, is only the first in a series of rate cuts. This expectation also significantly reduces the adverse impacts of a premature rate cut.
#EconomicUpdate #BoN #Namibia #RepoRate #InvestSensibly
