Declining repo rate supports domestic activities
The repo rate is the cost of borrowing for commercial banks from the central bank. A reduction in the repo rate will mean cheap borrowing for consumers from commercial banks.
22 September 2020 | Business
The very reason for these reductions is for average Namibians to have a little bit extra in their pockets. JG van Graan, CFO:Nedbank Namibia
PHILLEPUS UUSIKU
The Bank of Namibia (BoN) and the South African Reserve Bank (SARB) have cut the repo rate several times since both countries announced states of emergency, closed borders and locked down schools and businesses to curb the spread of the coronavirus.
“This was the right thing to do,” says JG van Graan, Nedbank Namibia’s CFO.
He added that the central bank had to provide immediate relief to consumers who have been retrenched, lost income or had to close their businesses for extended periods during the lockdowns.
On 19 August the BoN announced a 25-basis point reduction in the repo rate, bringing the rate at which the central bank loans money to commercial banks to a rate of 3,75%, a historic low. Resulting in the repo rate being reduced by a cumulative 2,75 percentage points since the beginning of 2020.
The cumulative reduction in South Africa's repo rate for 2020 is 300 basis points.
The BoN's Monetary Policy Committee, in their official statement, said at this level, the rate is appropriate to continue supporting domestic economic activity while at the same time safeguarding the one-to-one link between the Namibia Dollar and the South African Rand.
Interest rates are now the lowest level since Independence.
“Unfortunately, due to the devastating impact of the pandemic on the Namibian economy we will still see a major contraction in GDP growth for this year and sadly job losses will be prevalent across the different sectors in the economy.
“At Nedbank we strive to immediately change our prime and home loan rates with each reduction announced by BoN, to ensure the consumer receives the full benefit of the reduction as soon as possible.
“We, however, do not foresee significant further repo rate reductions. Generating gross domestic product (GDP) growth going forward will rely heavily on what policies will be adopted by the government to attract foreign direct investment and how quickly some of our key sectors such as tourism can recover. From a banking perspective further reduction in the repo rate will further compress the interest the banks earn and will put further pressure on earnings and profitability,” said Van Graan.
“The very reason for these reductions is for average Namibians to have a little bit extra in their pockets. Handy during these uncertain times, no doubt. Therefore, those fortunate enough to receive these windfalls, regardless of size, should use it wisely,” cautioned van Graan.
Impact
He further pointed out that the lowered repo rate has had the inverse impact on the majority of savings products of the banks, except for fixed deposits, the interest earned by consumers on the savings products would have decreased in line with the repo rate reductions.
He remains optimistic advising that the pandemic provided a perfect opportunity for us to relook our finances and priorities. According to van Graan, it may be tempting to spoil yourself with that little extra, however, paying off your loan faster means that you’ll save on the amount spent on interest. We've all learnt during the pandemic that savings go a long way and it is, therefore, advisable to start today, if you haven't already. Put that little extra you receive away in a savings plan that offers you the highest possible interest rate.”
While going into debt to fund your startup, study further or buying that luxury item you've wanted for so long, might now be easier than ever before, it's advisable to instead, set up a recurring monthly payment into a savings plan. With Nedbank Namibia, it can quite easily be done on your banking app.
He further cautions that the repo rate can affect property prices, savings and your credit profile. When taking out a loan, consumers should remember that rates could change and adjust their budgets accordingly.
“With higher interest rates your buying power diminishes when investing in property. An increase in lending rates could make your monthly loan repayments unaffordable if you already have a lot of debt.
And always make sure that your savings can cover your expenses for at least three months,” he said.
Van Graan said a very low amount of the bank’s funding is from the central bank and priced at repo rate. The majority of the funding portfolio is fixed-rate instruments, which has meant that the interest that banks paid for this funding has not decreased in line with the interest banks received from its customers, which has led to decreased interest income and profits.
Nedbank Namibia’s strategic priorities shifted as the country entered this crisis. Profitability, growth was a thing of the past from a strategic point of view and our number one priority was tilted to ensure we are there for our staff and our clients.
Van Graan noted that the bank has focused to ensure it remains highly liquid and well capitalised during the crisis, “ensuring our customers have peace of mind and can trust that Nedbank Namibia can weather this storm, and as we rise from this pandemic, together with our clients, we can rebuild a more robust Namibia.” [email protected]
The Bank of Namibia (BoN) and the South African Reserve Bank (SARB) have cut the repo rate several times since both countries announced states of emergency, closed borders and locked down schools and businesses to curb the spread of the coronavirus.
“This was the right thing to do,” says JG van Graan, Nedbank Namibia’s CFO.
He added that the central bank had to provide immediate relief to consumers who have been retrenched, lost income or had to close their businesses for extended periods during the lockdowns.
On 19 August the BoN announced a 25-basis point reduction in the repo rate, bringing the rate at which the central bank loans money to commercial banks to a rate of 3,75%, a historic low. Resulting in the repo rate being reduced by a cumulative 2,75 percentage points since the beginning of 2020.
The cumulative reduction in South Africa's repo rate for 2020 is 300 basis points.
The BoN's Monetary Policy Committee, in their official statement, said at this level, the rate is appropriate to continue supporting domestic economic activity while at the same time safeguarding the one-to-one link between the Namibia Dollar and the South African Rand.
Interest rates are now the lowest level since Independence.
“Unfortunately, due to the devastating impact of the pandemic on the Namibian economy we will still see a major contraction in GDP growth for this year and sadly job losses will be prevalent across the different sectors in the economy.
“At Nedbank we strive to immediately change our prime and home loan rates with each reduction announced by BoN, to ensure the consumer receives the full benefit of the reduction as soon as possible.
“We, however, do not foresee significant further repo rate reductions. Generating gross domestic product (GDP) growth going forward will rely heavily on what policies will be adopted by the government to attract foreign direct investment and how quickly some of our key sectors such as tourism can recover. From a banking perspective further reduction in the repo rate will further compress the interest the banks earn and will put further pressure on earnings and profitability,” said Van Graan.
“The very reason for these reductions is for average Namibians to have a little bit extra in their pockets. Handy during these uncertain times, no doubt. Therefore, those fortunate enough to receive these windfalls, regardless of size, should use it wisely,” cautioned van Graan.
Impact
He further pointed out that the lowered repo rate has had the inverse impact on the majority of savings products of the banks, except for fixed deposits, the interest earned by consumers on the savings products would have decreased in line with the repo rate reductions.
He remains optimistic advising that the pandemic provided a perfect opportunity for us to relook our finances and priorities. According to van Graan, it may be tempting to spoil yourself with that little extra, however, paying off your loan faster means that you’ll save on the amount spent on interest. We've all learnt during the pandemic that savings go a long way and it is, therefore, advisable to start today, if you haven't already. Put that little extra you receive away in a savings plan that offers you the highest possible interest rate.”
While going into debt to fund your startup, study further or buying that luxury item you've wanted for so long, might now be easier than ever before, it's advisable to instead, set up a recurring monthly payment into a savings plan. With Nedbank Namibia, it can quite easily be done on your banking app.
He further cautions that the repo rate can affect property prices, savings and your credit profile. When taking out a loan, consumers should remember that rates could change and adjust their budgets accordingly.
“With higher interest rates your buying power diminishes when investing in property. An increase in lending rates could make your monthly loan repayments unaffordable if you already have a lot of debt.
And always make sure that your savings can cover your expenses for at least three months,” he said.
Van Graan said a very low amount of the bank’s funding is from the central bank and priced at repo rate. The majority of the funding portfolio is fixed-rate instruments, which has meant that the interest that banks paid for this funding has not decreased in line with the interest banks received from its customers, which has led to decreased interest income and profits.
Nedbank Namibia’s strategic priorities shifted as the country entered this crisis. Profitability, growth was a thing of the past from a strategic point of view and our number one priority was tilted to ensure we are there for our staff and our clients.
Van Graan noted that the bank has focused to ensure it remains highly liquid and well capitalised during the crisis, “ensuring our customers have peace of mind and can trust that Nedbank Namibia can weather this storm, and as we rise from this pandemic, together with our clients, we can rebuild a more robust Namibia.” [email protected]
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