NAMIBIA repo rate increases. This is good or bad news depending on whether you are a net borrower or a net saver.
For net savers at commercial banks, this means interest on savings will rise slightly, but net borrowers’ portfolios will feel more pressure.
Announcing the increase yesterday, Bank of Namibia (BoN) Governor Johannes !Gawaxab said it was time for the central bank to lower the rate from 3.75% to 4%. This will bring Namibia level with South Africa.
This will raise the prime interest rate from 7.5% to 7.75% – a similar increase of 25 basis points should affect mortgage rates, personal loans and overdrafts.
On reflex, interest on savings should also increase slightly, but not in the same proportion.
!Gawaxab said the interest rate hike was appropriate to preserve the one-to-one link between the Namibian dollar and the South African rand, while respecting the country’s international financial obligations.
Normally, the governor would say the rate is appropriate to support domestic economic activity, but he didn’t mention it yesterday.
He said, however, that all members of the Monetary Policy Committee (MPC) voted for a 25 basis point (bp) increase.
“This decision was taken following a review of global, regional and national economic and financial developments. The MPC believes the increase is appropriate,” he said.
The Governor further stated that this monetary policy stance is also a step towards normalizing the current environment of negative real interest rates and establishing a positive real interest rate conducive to economic growth. long-term.
Negative interest rates occur when the average interest rate earned on savings slips below average inflation, a bad state for savers who lose money by keeping it in savings accounts .
At the end of the third quarter of last year, Namibians had more than N$22 billion in fixed deposit accounts, earning less than inflation.
The governor said Namibia’s headline inflation is expected to average around 4.4% in 2022 and 4.5% in 2023, down from 3.6% recorded in 2021.
This should be almost on par with average deposit rates, which on an annual basis stand at 5.5%.
Analysts at Simonis Storm Securities say they expect the repo rate to rise to 5% by the end of this year.
“We expect the Bank of Namibia to increase the repo rate by 125 basis points in 2022, increasing the repo rate from 3.75% to 5%, then increasing the prime interest rate from 7.5% to 8.75% by the end of 2022,” their outlook read in January.
The Governor said that although headline inflation remains within a reasonable range, its food and transport components are expected to increase in the near future and may continue to have a disproportionate effect on the low-income segment of society, and therefore require a close supervision.
It’s bad for many wallets, and banks probably aren’t lending to over-stressed households.
Interest rate hikes in a stagnant economy would put households in a very bad position, and some banks are cautiously rejecting loan applications.
Simonis Storm said credit demand will remain subdued – not only due to private sector solvency issues due to a low growth environment, but also due to increasingly cautious and risk averse commercial banks in loans to the public.
“For example, we are aware that many customers from different dealerships have their car loans refused by the banks. Another factor would be that banks will start charging higher interest rates on shorter-term deposits and money market securities, which will increase the risk between lending money to customers and safely obtaining higher yields,” the analysts said.
Salomo Hei, head of research at High Economic Intelligence, said yesterday that while not everyone is hit by the rate increases, it will certainly have an impact on the standard of living of the average Namibian.
“It’s going to get harder,” he said.
The governor said that although the repo rate is primarily used to regulate prices in the country, there has been some disconnect from what the repo is capable of achieving, as most price increases stem from price constraints. supply for certain categories of food, an increase in international prices, oil prices and an increase in housing rents.
Looking ahead, the national economy is expected to grow by around 3% in 2022, and risks to the national medium-term economic outlook remain amid sudden spikes in Covid-19 cases and vaccine hesitancy. .
“MPC would like to reiterate that addressing vaccine hesitancy remains key to the breadth, speed and sustainability of economic recovery,” the governor said.
On reserves, the governor said at the end of January 2022, the preliminary stock of international reserves stood at N$42.9 billion, compared to N$43.9 billion at the end of December 2021. A higher interest rate will reduce also capital flow to South Africa said the governor.
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