Consecutive 75 basis points interest rate hike
Repo rate increases to 6.25%
Year to date, the Bank of Namibia (BoN) increased the repo rate by 250 basis points (bps).
The Bank of Namibia (BoN) announced a second consecutive 75 basis points (bps) increase in the repo rate from 5.50% to 6.25%, bringing it on par with South Africa.
That means the prime lending rate for local commercial banks will also increase from 9.25% to 10%. The prime lending rate in South Africa currently stands at 9.75%.
Year to date, with only one monetary policy announcement left for the year 2022, which expected to take place at the end of November, the central bank increased the repo rate by 250 basis points.
According to Theo Klein, economist at Simonis Storm, the repo rate remains low relative to inflation in Namibia and South Africa, suggesting that monetary policy is accommodative at the moment. According to the Namibia Statistics Agency (NSA), inflation stood at 7.1% in September 2022, compared to 7.3% August 2022.
“However, the gap is narrowing as rates rise and we believe inflation has peaked in July 2022 in South Africa and August 2022 in Namibia,” Klein said.
Central bank governor Johannes !Gawaxab said the monetary policy stance is necessary to narrow the current negative real policy interest rate. It is also consistent with that taken around the globe and in the region, with policy makers acting with resolve to slow and eventually reverse the current acceleration in Inflation.
According to Klein, going forward, “we certainly expect inflation to come in lower during the remainder of 2022 and 2023 as well.”
“The South African Reserve Bank’s (SARB’s) Quarterly Projection Model (QPM) estimates a neutral rate of 6.75%, while other economists estimate between 7.25% and 7.50%. The neutral rate is theoretically the interest rate at which monetary policy is neither expansionary nor contractionary, keeping inflation constant. As the repo rate approaches the neutral rate, it could warrant the SARB to be more gradual in the pace of interest rate hikes going forward.”
Credit uptake
!Gawaxab noted that since the last monetary Policy Committee (MPC) meeting, year-on-year growth in private sector credit extension growth (PSCE) improved to 4.6% in August 2022, from 3.4% in June 2022.
“Despite this improvement, growth in credit uptake by the private sector generally remains subdued. The increase in PSCE was mainly driven by businesses in the form of short-term credit facilities as well as instalment and leasing credit by corporates in the mining and services sectors. For the first eight months of 2022, growth in credit uptake by the private sector increased to 3.5%, higher than the 2.5% registered during the same period in 2021,” he pointed out.
Tight financial conditions for indebted Namibian households and corporates lie ahead as rate hikes are expected to rise further towards the end of this year and during the first quarter of 2023, Klein said.
“Minutes from the Federal Open Market Committee (FOMC) meeting indicated that historical experience demonstrated the danger of prematurely ending periods of tight monetary policy designed to bring down inflation”. This supports the notion that although the rate hiking cycle might end in the first quarter of 2022, interest rates globally and locally will likely remain at elevated levels for a while, before we see rate cuts taking place.”
“Hence, we expect a 50bps repo rate hike in the first quarter of 2023 in both South Africa and Namibia, followed by two consecutive 25 basis points cuts in the third and fourth quarters of 2023,” he [email protected]
That means the prime lending rate for local commercial banks will also increase from 9.25% to 10%. The prime lending rate in South Africa currently stands at 9.75%.
Year to date, with only one monetary policy announcement left for the year 2022, which expected to take place at the end of November, the central bank increased the repo rate by 250 basis points.
According to Theo Klein, economist at Simonis Storm, the repo rate remains low relative to inflation in Namibia and South Africa, suggesting that monetary policy is accommodative at the moment. According to the Namibia Statistics Agency (NSA), inflation stood at 7.1% in September 2022, compared to 7.3% August 2022.
“However, the gap is narrowing as rates rise and we believe inflation has peaked in July 2022 in South Africa and August 2022 in Namibia,” Klein said.
Central bank governor Johannes !Gawaxab said the monetary policy stance is necessary to narrow the current negative real policy interest rate. It is also consistent with that taken around the globe and in the region, with policy makers acting with resolve to slow and eventually reverse the current acceleration in Inflation.
According to Klein, going forward, “we certainly expect inflation to come in lower during the remainder of 2022 and 2023 as well.”
“The South African Reserve Bank’s (SARB’s) Quarterly Projection Model (QPM) estimates a neutral rate of 6.75%, while other economists estimate between 7.25% and 7.50%. The neutral rate is theoretically the interest rate at which monetary policy is neither expansionary nor contractionary, keeping inflation constant. As the repo rate approaches the neutral rate, it could warrant the SARB to be more gradual in the pace of interest rate hikes going forward.”
Credit uptake
!Gawaxab noted that since the last monetary Policy Committee (MPC) meeting, year-on-year growth in private sector credit extension growth (PSCE) improved to 4.6% in August 2022, from 3.4% in June 2022.
“Despite this improvement, growth in credit uptake by the private sector generally remains subdued. The increase in PSCE was mainly driven by businesses in the form of short-term credit facilities as well as instalment and leasing credit by corporates in the mining and services sectors. For the first eight months of 2022, growth in credit uptake by the private sector increased to 3.5%, higher than the 2.5% registered during the same period in 2021,” he pointed out.
Tight financial conditions for indebted Namibian households and corporates lie ahead as rate hikes are expected to rise further towards the end of this year and during the first quarter of 2023, Klein said.
“Minutes from the Federal Open Market Committee (FOMC) meeting indicated that historical experience demonstrated the danger of prematurely ending periods of tight monetary policy designed to bring down inflation”. This supports the notion that although the rate hiking cycle might end in the first quarter of 2022, interest rates globally and locally will likely remain at elevated levels for a while, before we see rate cuts taking place.”
“Hence, we expect a 50bps repo rate hike in the first quarter of 2023 in both South Africa and Namibia, followed by two consecutive 25 basis points cuts in the third and fourth quarters of 2023,” he [email protected]
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