Which way interest rates? I wish I knew somebody that knows
The central bank’s monetary policy committee meets again next week and is scheduled to announce the monetary policy for the next two months, on Wednesday, 22 August. This leaves two more meetings for this year, with announcements to be made on 24 October and 12 December.
As we stand now, there is a full percentage point difference between the South African repo rate (5%) and the local repo rate (6%). With prime rate, the difference is slightly bigger, local prime being 9.75% while the South African rate is 8.5%.
When an MPC announcement date approaches, there is always much anticipation in the private sector. Interest rates are the foundation for a host of other benchmarks, and as such, constitute the primary view the central bank takes on future events. Therefore, it has become customary for the Bank of Namibia to provide an extensive economic overview as part of its regular monetary policy announcements.
At the previous meeting in June, the consensus view from local analysts was for the central bank to keep rates on hold. This turned out to be so. Speaking to a few informed analysts this week, I failed to detect a consensus. There were as many responses arguing for rates to remain unchanged, as there were for a small, 0.25 to 0.5 percentage point reduction. The only hint at a consensus is that most analysts feel a 0.25 percentage point reduction is disruptive and does not achieve much. If there were to be a decrease, then rather a full half percent than just one quarter of a percent.
Given the rather bleak picture painted in the June statement, I doubt the committee will find anything to be upbeat about. Depending on one’s point of view, the only positive reference in the previous statement was to the growth in credit extension to the private sector which, by end of April this year, has approached its historical mean of around 13% measured monthly, compared to the same month a year ago. But the counterpoint, as pointed out by the committee, was that the growth in private sector credit, was mostly unproductive with personal overdrafts and credit cards making up the bulk of the uptake. This is clearly a sign of a consumer in distress.
Of course, the committee will carefully have to consider the direction of inflation. This, surprisingly started moving lower from around May, but as is widely known, it only pertains to so-called core inflation, i.e. general inflation excluding fuel and food. And while there has been a noticeable downward trend in both meat and grain prices for a few months, grain prices recently reversed this trend moving higher upon the expectation that the grain harvest in the United States will disappoint. Fuel followed a similar pattern, moving sharply lower for two months in a row, but then, over the last month, remaining stuck above specific levels, and lately moving up again. So, the respite to both households and companies in the form of slightly lower fuel prices, was shortlived. My view is that core inflation wil probably continue to trend lower as a result of strong deflationary pressures in the the economies of our main trading partners, but that fuel and food will continue to increase, as a result of speculative pressure in commodities markets where the international prices are determined. So, no expected respite from those two crucial commodities.
It will probably be the safest move, not to move meaning, on a balance of probabilities, keeping interest rates steady until we have a clearer indication of where our trading partners are headed. We will avoid being forced to increase rates again too soon, if conditions internationally get worse. The only problem, after South Africa’s surprise decrease a month ago, is that the interest rate gap becomes uncomfortably big with our most important trading partner. It also has consequences on local liquidity, but I am not aware of any distress signals in this regard. Local liquidity seems just fine and will continue to be so for as long as local banks stick to their tight lending policies as a result of rather disappointing domestic growth expectations.
In short, I do not think there is any clever take on which way interest rates will go next week. Arguments for holding it steady are just as compelling as those against. The domestic economy does not need an injection of liquidity. The problems we face are not locally induced, rather they are the result of events far away from our borders. Bringing the local repo rate down by half a percentage point will not stimulate the economy, it will only provide a modicum of relief for consumers. It will also have limited impact on future inflation expectations, as in this case too, we are the victims of tidal forces generated on foreign shores.