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Expect borrowing to become more expensive as Bank of Namibia raises interest rates three times in 2022

Expect borrowing to become more expensive as Bank of Namibia raises interest rates three times in 2022

By Josef Kefas Sheehama.

The annual inflation rate recorded for June 2016 was 6.7%, a steep increase compared to just over a year earlier in April 2015 when the annual inflation rate measured monthly, came to only 3.4%.

Most recently, inflation has again shown a rising trend, increasing to 4.5% last month (January 2022) from 4.1% in December 2021.

Inflation, economic growth and the interest rate are central and interrelated in macroeconomics, displaying both a theoretical and an empirical relationship. In my view, as an independent economic and business analyst, I strongly believe that the Monetary Policy Committee (MPC) of the Bank of Namibia will increase the repurchase rate by 25 basis points to 4% from 3.75% on 16 February 2022.

Taking a somewhat longer view, other economists anticipate that the MPC will hike interest rates by 125 basis points by end-2022 to address rising inflation as a result of increases in the prices of items such as electricity, gas, fuel, food and transport. For policymakers, inflation hampers economic growth and development as it discourages investment and savings.

The effect of inflation and interest rates on economic growth is a serious problem. Progress to reducing inequality has been slow and as a result, Namibia remains one of the most unequal countries in the world. Namibia’s past economic growth has not been enough to deal with the country’s triple challenge of high poverty, inequality, and unemployment.

The weakening of growth in the last few years combined with the COVID-19 shock further put at risk social development progress. There is still a need for the government to create a conducive social and political environment to attract foreign investors into various sectors of the Namibian economy. That the Namibian economy is growing very slowly can be traced back to the inflation versus interest rate conundrum.

The anticipated rise in inflation is further exacerbated by the price increase if a range of commodities, both local and imported, as a result of weakness in the exchange rate over which we have very little control.

I must also state that irrespective of higher inflation, interest rates have broadly been way too low for too long. When rates start rising, as I expect and stated above, different sectors will be impacted differently and will be the determining factor of how company prices will be affected.

With higher interest rates, Namibians are likely to find themselves paying more for loans this year. Tightening monetary policy raises the costs of borrowing for consumers and businesses, weakening demand and curbing prices. But it could also pinch people’s budgets as the Bank of Namibia continues to normalize policy over the rest of 2022  Money will become more expensive. The Bank of Namibia is realizing that by having so much cheap money available, it is really causing a lot of consumers to spend. Over-expansion of the money supply can also create demand-pull inflation.

Note that the money supply is not just cash, but also credit, loans, and mortgages. When the money supply expands, it lowers the value of the dollar. When the dollar declines relative to the value of foreign currencies, the prices of imports rise.

Interest rates returning to more normal levels is not necessarily a bad thing. It generally is a recognition of better economic growth and better economic conditions. But whenever there is change, there is some anxiety that comes with it.

The corona virus isn’t going to be public enemy number One for the economy in 2022. The biggest dangers this year will stem from inflation and the risk that policymakers will call the post-COVID-19 recovery wrong. This is the year we will find out whether the global economy is robust enough to get by with less help from governments and central banks. And whether inflation is a temporary byproduct of COVID -19 or a more persistent problem.

Since it takes so long to move on, it may need a kick and markets are now betting the Bank of Namibia will hike interest rates at least three times in 2022. Omicron appears to be more contagious but less deadly than earlier variants. Spikes in infections could still weigh on economic activity in the short term by pushing absenteeism sharply higher.

To believe it’s going to take more than a few interest-rate increases to kill inflation, it helps to have the view that supply side problems are only partly to blame for higher prices. Inflation is a sustained increase in the general price level of goods and services in an economy over a period of time

Since interest rates determine the price of money, it is logical to assume that if the price of money increases then the prices of goods will also increase.

Suppressing the higher inflation would require deliberate corrective action. I believe the Bank of Namibia had managed the economy well during COVID 19, effectively using the tools available to it to achieve its goals of maintaining the stability of the currency, ensuring full employment and furthering the economic prosperity and welfare of the people of Namibia.


 

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