There is room for more than a 25 basis point reduction in the repo rate but not in one go
“The MPC took this decision in order to continue supporting domestic economic activity and to maintain the one-to-one link between the Namibia Dollar and the South African Rand.”
This quote comes from the minutes of the MPC meeting held in August last year. The minutes of the last MPC meeting on 04 December 2019 has not been published yet but if the historical pattern is anything to go by, the December minutes will probably be published on Monday, 17 February, a day before the scheduled Monetary Policy Committee meeting.
The next Monetary Policy Committee meeting will be the first for 2020. While the consensus view was that the repo rate will remain unchanged at least for the first semester, local analysts have quickly found a new tune after the South African Reserve Bank’s Monetary Policy Committee surprised markets with an unexpected reduction of the SA repo rate last month.
Against all expectations, the Reserve Bank announced a 25 basis point reduction in the SA repo rate on 16 January. This was a unanimous decision by the committee, indicating that the South African economy really is in dire straits and that every committee members realises the severity of the situation. It was however, not the consensus opinion among economists and analysts and the move caught everybody off guard. Still, going by the text of the committee’s announcement, the decision was weighed carefully and discussed in depth.
In Namibia, the last adjustment to the local repo rate was in August 2019 when it was reduced by 25 basis points from 6.75% to 6.5%. I do not know how many analysts bother to read the minutes of the Bank of Namibia’s Monetary Policy Committee meetings since they are all based on the same template. It is actually quite boring stuff but every now and then a gem surfaces, especially when their analysis is convincingly off track.
Be that as it may, the minutes of the August 2019 meeting, only published on 22 October, offered the snippet quoted at the beginning. This confirms that Namibian monetary policy is basically set in Pretoria.
For the first ten years after Independence, the local basic interest rate also followed the SA repo rate but was typically in the order of 1.5% to 2% higher than in South Africa. This was always defended as a necessary precaution to ensure sufficient local liquidity since the SA giant would simply drain Namibian liquidity were interest rates the same. During those years, what we know today as the so-called repurchase rate, or repo rate, was called the bank rate in Namibia.
Given the interest rates of the past six years or so, a 2% premium above the SA rate may seem punitive but it must be remembered that the bank rate was in the order of 16% and above, basically more than double what the repo rate is today.
As the local capital market developed, this scenario changed gradually and for several years, our repo rate has tracked the SA repo rate in lockstep.
Therefore it is not farfetched to expect the Bank of Namibia’s Monetary Policy Committee also to bring the Namibian repo rate down by 25 basis points at the 18 January meeting. In such a move, the committee is further supported by headline inflation of only 2.6% and local bank liquidity that has been negative for the better part of two weeks. (I can remember only one instance where Namibian inflation was lower than the current value and that was in 2005.)
Conventional economics teaches that if a central bank wants to increase liquidity, it lowers the basic short-term lending rate and conversely, when it wants to bleed liquidity out of the system, it increases this rate.
With inflation where it is, comparable to inflation of the 1960s, there is room for a cut bigger than the expected .25 percentage point adjustment. But this does not need to be done all at once. In practice, the central bank has the opportunity to adjust rates every second month so ‘treading lightly’ is probably the sensible thing to do.
I think, Wait and See is all the local MPC can do at this stage, but given SA’s surprise move two weeks ago, I will not be surprised if the local rate goes to historically low values later this year. After all, did not the central bank also put it on paper that they take their monetary decisions to “continue supporting domestic economic activity.”