No interest rate relief expected

Analysts expect the Bank of Namibia (BoN) will maintain its repo rate at 7.75% today, a level unchanged since June last year.

Market Watch spoke to Cirrus Capital, High Economic Intelligence (Hei), IJG Securities and Simonis Storm (SS) and all agreed that the decision of the Monetary Policy Committee (MPC) of the central bank will be to leave the repo rate – the rate at which commercial banks borrow from the BoN – unchanged. This will means that the prime lending rate at commercial banks will also remain steady at 11.5%.

SS research chief Max Rix said should the BoN decide to keep rates unchanged, it will reflect “a strategic pause that marks the conclusion of the rate hiking cycle”.

The central bank has been on an aggressive rate hike since the beginning of 2022, following the record low repo of 3.75% to buffer the impact of the Covid-19 pandemic in the latter part of 2020 and the entire 2021.

According to Rix, such a strategic pause, underscored by a moderating inflationary trend, “signals a favourable environment for the central bank to potentially shift towards a policy of rate reductions”.



‘Dovish’

Cirrus research head Robert McGregor pointed out that Namibia’s repo rate is still 50 basis points (bps) below that of the South African Reserve Bank after the SARB last month opted to keep its repo unchanged at 8.25%.

The gap has not resulted in material capital outflows from Namibia to South Africa, McGregor added.

According to IJG research chief Danie van Wyk, “a lot of Namibian cash is already parked in liquid assets in South Africa”. Therefore, “it is highly unlikely that the BoN will cut rates before the SARB does, to prevent further capital outflows”.

McGregor said the BoN’s MPC “appears more dovish than its counterpart in South Africa”. However, given the currency peg, the BoN “will be cautious of moving too far away from the South African repo rate”.



Credit, inflation

Private sector credit extension (PSCE) growth remains weak, McGregor said.

It decelerated to 2.0% year-on-year (y/y) in December, marginally down from 2.1% the previous month, but significantly lower than the 11.0% growth recorded in December 2022.

Inflationary risks, however, persist, he said. “These include increased demand with wage adjustments coming into effect later this year, higher global logistics costs, food inflation not slowing as quickly as anticipated, as well as risks around the exchange rate given developments in South Africa and upcoming elections there.”

Namibia’s average inflation rate last month came in at 5.4%, up from 5.3% the previous month, but lower than the 7.0% a year ago.



Outlook

SS projects “a cautious approach towards monetary easing”, with a potential rate cut of approximately 25 bps expected towards year-end, Rix said.

“Namibia's move towards lowering interest rates aligns with the global trend of slowing inflation seen in major economies like the USA and Europe, which are also expected to implement interest rate cuts,” he added.

This decision is both a strategic choice and a response to wider economic trends, aimed at enhancing economic stability and growth, according to Rix.

“By aligning its monetary policy with both regional and global economic changes, Namibia seeks to improve its economic growth, using the decrease in domestic inflation pressures to stay in step with international and regional monetary developments,” he said.

The SARB’s MPC maintains “a hawkish tone”, McGregor said.

“In our view, rate cuts are further away than the market currently prices,” he added.