Analysts divided on rate cut
The decision by the central bank to cut interest rates by 50 basis points has left analysts divided with some saying the decision caught them by surprise.
An economist for Capricorn Asset Management, Patrick Britz says on inspection of previous Monetary Policy Committee statements alone, the Bank of Namibia’s (BoN) decision to cut the interest rate by 50 basis points comes as a bit of a surprise.
“This is mainly because in the June announcement, BoN expressed concern over increased borrowing by the household sector towards less productive activities which include instalment credit as well as lending towards personal loans, overdrafts and credit cards. The scope of this ‘concerning’ credit growth has remained largely unchanged since the last statement, which explains why some might be surprised by the bank’s latest move.”
Britz added that by cutting the repo rate, the bank have effectively made it cheaper for citizens to borrow.
“As a result we are likely to see even stronger credit growth in the coming months as demand for interest sensitive items will undoubtedly increase. Furthermore, the last policy statement also aluded to Namibia’s declining savings rate, which the bank considers to be a cause for concern. An interest rate cut will not help the declining savings rate, as it has effectively caused a negative real interest rate of 0.5 percent (repo rate less inflation rate). This provides less incentive for individuals to save.”
FNB economist Daniel Motinga said he was equally caught off guard by the rate cut but understands why the central bank took the decision to cut interest rates. He said: “It was a bit of a surprise personally but that is in lieu of the weakening in growth outlook. If you look at the growth figure of 3.6% for the first quarter of 2012 compared to the growth figures of 11% in the last quarter of 2011 and 7% in the first quarter of 2011, the growth momentum has slowed.”
Rudolf Kuschke, an analyst with Simonis Storm Securities, however said the rate cut was expected.
He said: We basically expected it to go down by 50 basis points especially after the South African Reserve Bank lowered their rates by 50 basis points, and with the inflation rate trending downwards. Save for the month of July when the inflation rate increased to 6%, the general trend is still downwards and that warrants a decrease of the rates to put some extra cash in the hands of the consumer so that they can spend more and get the economy going.”
The South African Reserve Bank recently cut its repo rate by 50 basis points. However, there was no consensus among local analysts on whether the Bank of Namibia will follow the reserve bank’s direction.
Asked whether the decision to cut the interest rates was largely influenced by Namibia’s biggest trading partner, governor Shiimi said: “We are in a Common Monetary Area where interest rates practically have to be more or less the same. We differ here and there and we have differed several times. As you know that even with this decrease we will be above South Africa. But what needs to be understood is that within the context of the CMA , and as long as we are in the CMA, people should not expect a significant difference between Namibia and South Africa otherwise we will not be able to support the arrangement the way it is.”
He added: “This CMA arrangement will break up if we start to diverge significantly from each other, so if we decide to do that it’s because we want to redesign the arrangement, and we don’t think it is appropriate to redesign the arrangement now. So if we do anything to the contrary that will break up the CMA agreement then I think we are not doing what we are supposed to be doing.”