Supply side factors inflation difficult to control
Raising interest rates will do little impact
Probabilities of recessions have increased as a result of surging global oil prices and supply chain constraints due to disruptions in Ukraine and Russia.
PHILLEPUS UUSIKU
Generally, expansionary policies are inflationary, while contractionary policies lead to lower in inflation.
Domestic inflation forecasts are expected to be driven mainly by supply side rather than demand side factors. Simonis Storm argues that raising interest will do little to control inflation.
Probabilities of recessions have increased as a result of surging global oil prices, and supply chain constraints and logistics costs have intensified with disruptions in Ukraine and Russia.
According to Simonis, for emerging markets, like Namibia, raising interest rates will be an attempt to limit foreign capital outflows and currency depreciation which in itself is inflationary.
About N$7.5 billion in liquidity left Namibia during December 2021 to January 2022 in search of better yields in South Africa when the Namibian repo rate was 25 basis points (bps) lower than South Africa’s repo rate, SS pointed out.
High interest rates attract foreign capital as returns will be high, while strengthening the domestic currency at the same time. An appreciation in the domestic currency makes imports cheaper and exports expensive.
During the Covid-19 pandemic, emerging markets have strained government budget balances and debt positions, making it challenging for them to spend, which further hampers demand side inflation.
Namibia had lower annual inflation rates during the second half of 2021 compared to most advanced economies such as the US, UK, Germany and Spain, SS added.
Better economic recoveries following lockdown induced recessions seen in advanced economies and large-scale fiscal stimulus led to stronger demand side inflationary pressures compared to emerging markets.
This could explain why advanced economies saw higher inflation rates than emerging markets in 2021 as they had both demand and supply side inflationary pressures, Simonis Storm said.
Expectations
“We adjust our inflation forecast for Namibia up from 4.7% to 6.1% for 2022. We believe this forecast is on the conservative side as we factor in Brent crude at US$140 and an average Rand exchange rate of 15.30 against the US dollar. If any of these indicators deteriorate more than we anticipate due to a prolonged war in Ukraine, inflation will likely rise to about 10.4% in 2022,” SS said.
In Namibia, disposable incomes will be under severe pressure as a result of higher fuel and food prices and more so for lower income or informal sector workers who are now eligible to pay income tax as a result of our tax brackets not being adjusted for inflation, SS pointed out.
“We believe the Bank of Namibia (BoN) will hike by 25 basis points (bps) more than South African Reserve Bank (SARB) in 2022 due to an attempt to minimise capital outflows in managing the peg.”
The next monetary policy announcement by the central bank is expected to take place on 13th April 2022.[email protected]
Generally, expansionary policies are inflationary, while contractionary policies lead to lower in inflation.
Domestic inflation forecasts are expected to be driven mainly by supply side rather than demand side factors. Simonis Storm argues that raising interest will do little to control inflation.
Probabilities of recessions have increased as a result of surging global oil prices, and supply chain constraints and logistics costs have intensified with disruptions in Ukraine and Russia.
According to Simonis, for emerging markets, like Namibia, raising interest rates will be an attempt to limit foreign capital outflows and currency depreciation which in itself is inflationary.
About N$7.5 billion in liquidity left Namibia during December 2021 to January 2022 in search of better yields in South Africa when the Namibian repo rate was 25 basis points (bps) lower than South Africa’s repo rate, SS pointed out.
High interest rates attract foreign capital as returns will be high, while strengthening the domestic currency at the same time. An appreciation in the domestic currency makes imports cheaper and exports expensive.
During the Covid-19 pandemic, emerging markets have strained government budget balances and debt positions, making it challenging for them to spend, which further hampers demand side inflation.
Namibia had lower annual inflation rates during the second half of 2021 compared to most advanced economies such as the US, UK, Germany and Spain, SS added.
Better economic recoveries following lockdown induced recessions seen in advanced economies and large-scale fiscal stimulus led to stronger demand side inflationary pressures compared to emerging markets.
This could explain why advanced economies saw higher inflation rates than emerging markets in 2021 as they had both demand and supply side inflationary pressures, Simonis Storm said.
Expectations
“We adjust our inflation forecast for Namibia up from 4.7% to 6.1% for 2022. We believe this forecast is on the conservative side as we factor in Brent crude at US$140 and an average Rand exchange rate of 15.30 against the US dollar. If any of these indicators deteriorate more than we anticipate due to a prolonged war in Ukraine, inflation will likely rise to about 10.4% in 2022,” SS said.
In Namibia, disposable incomes will be under severe pressure as a result of higher fuel and food prices and more so for lower income or informal sector workers who are now eligible to pay income tax as a result of our tax brackets not being adjusted for inflation, SS pointed out.
“We believe the Bank of Namibia (BoN) will hike by 25 basis points (bps) more than South African Reserve Bank (SARB) in 2022 due to an attempt to minimise capital outflows in managing the peg.”
The next monetary policy announcement by the central bank is expected to take place on 13th April 2022.[email protected]
Comments
Namibian Sun
No comments have been left on this article