Snapshot on Bank of Namibia hike in repo rate
By Josef Kefas Sheehama.
The Monetary Policy Committee lifted the bank rate by 25 basis points from 4.00% to 4.25% on 13 April 2022. The next MPC meeting will be held on the 15 June 2022.
When borrowing money becomes more expensive across the economy, it discourages people and businesses from taking loans. That should mean less spending, which in turn should mean prices of goods and services fall. As rates rise, people are also less likely to borrow or re-finance existing debts, since it is more expensive to do so.
If you are a borrower, rising interest rates will usually mean that you will pay more for borrowing money, and conversely, lower interest rates will usually mean you will pay less. How much of an impact will all depend on whether your borrowing is tied more to short-term rates or longer-term rates. So as with many things in life, whether rising or falling interest rates are better depends on which side of the coin you are on. Even the Bank of Namibia does not really favour higher rates in general, they just want a moderate level of rates that is steady, predictable and conducive to a healthy level of both growth and inflation in the economy. Because ultimately, the market values steady, predictable growth and hates uncertainty above all else.
The interest rate hike has a negative impact on the performance of Namibian economy. My view is that it is not appropriate at this time. Business and the economy are grappling with too many shocks already, which are increasingly becoming impossible to bear. High interest rate has become a major burden for many investors and high non-performing loans are posing a serious risk to the stability of the financial system. Furthermore, the economy is still essentially bedevilled by the large size of an inefficient public sector, low rates of savings and investment, persistent large budget deficits, and an inconsistent macroeconomic environment. Increasing interest rates mean increasing the cost of borrowing. If the cost of funds goes up, local production would suffer. Thus, increasing interest rate is not consistent with the plan to increase local production.
A rise in interest rates would be a particular challenge for the government, since interest payments are funded out of the operating budget which must be balanced each fiscal year. However, given the long-term nature of outstanding state and local debt, it will take a prolonged period of higher interest rates to seriously impact the budget. One of the constraints for mall enterprises is a high interest rate. Big companies may survive it but it would pose a serious challenge to small enterprises.
In Namibia’s case, the current inflation is imported. It is a response to scarce foreign exchange to avoid depleting Namibia’s international reserves. High inflation can be extremely damaging to both consumers and businesses. Fortunately, since we have not yet started to see a buildup of inflationary pressures, the Bank of Namibia can afford to act slowly, with small, incremental interest rate increases.
Warning: International unrest events will influence inflation; therefore I anticipate that the MPC will have hiked interest rate by 12 bps by the end of 2022.