Bank of Namibia’s interest rate hike: Nail on the Head
By Josef Kefas Sheehama.
As inflation continues to soar, with the Consumer Price Index (CPI) hitting 5.6% in April, the Bank of Namibia is poised to hike the repo rate by 0.5% basis points on 15 June 2022.
The Bank of Namibia usually increase interest rates when inflation is predicted to rise above their inflation target. Namibia’s overall inflation is now projected to average around 6% for 2022, higher than the previous forecast of 4.4 percent according to Bank of Namibia.
The ongoing conflict in Ukraine is set to lower global growth prospects and increase inflationary pressures across the world. Rocketing energy and food costs have precipitated the worst cost of living crisis, with the war in Ukraine threatening to worsen the price shock. According to Mr Akinwumi Adesina, President of the African Development Bank (AfDB), the Russia-Ukraine crisis will hurt Africa’s agricultural and energy sectors which are crucial for the continent’s economic development.
The continent imports about two million metric tons of fertilizers per year from Russia and Ukraine which account for a large share of global energy exports, as well as exports of a range of metals, food staples and agricultural inputs.
As a small open economy, Namibia is vulnerable to global forces like rising producer and consumer price inflation. Local electricity and fuel prices are increasing while weakness in the Namibian Dollar is always a real risk. The volatile exchange rate is at the mercy of international financial market sentiment and could weaken if the geopolitics around the Ukraine-Russia situation deteriorates further.
The stronger demand for US Dollars will convince the Bank of Namibia to tighten monetary conditions as is the trend across global central banks to manage foreign exchange reserve depletion.
In the meantime, businesses must look at every cost-cutting opportunity to channel investments to strengthen their value proposition. It is important to connect a company’s budget directly to strategic priorities. If it does not reflect key priorities, there is little chance of executing the organization’s vision. This entails viewing costs not merely as an in-year expense but also as a multi-year investment in differentiating capabilities designed to help execute the company strategy.
Moreover, higher inflation brings with it rising interest rates which in turn impacts multiple sectors and its growth prospect. With higher commodity prices, businesses grapple with high input costs, resulting in passing on higher prices to consumers. High prices in turn impacts demand. A rise in interest rates has a significant impact on how business owners and customers interact with each other. Interest rate hikes can impact profits, savings, and whether or not a business will have access to financing. Whenever interest rates increase, consumers end up paying more for new debt.
Because they pay more interest to lenders, they have less discretionary income. As a business owner, if you buy and sell luxury items, you might suffer a slight dip in your sales since customers have less to spend on luxury products. Consumers tend to eliminate luxury items first from their purchase lists whenever things get tough. The rising interest rates affect your day to day financial business operations. It makes your long term debt more expensive. Almost every business has long term debt. If you have variable interest rates on your loans, your loans can get more expensive. It can mean you’ll be paying them off for longer than you anticipated, which can increase the cost of your financing and reduce your income.
Higher interest rates don’t only affect long term loans they also have an almost immediate effect on short term loans. It makes it more difficult for a small business to meet their daily financial obligations in the event that emergency expenses may come up. Any business owner looking to borrow capital to expand their operations will have to contend with a higher cost of capital to do so.
It can also mean that operational costs go up. Couple that with the fact that your potential customers now have less discretionary income and you may see your profits go down. When labour wages can’t keep up with the rate of retail price inflation, the purchasing power of those wages, decreases. Low income families face it like nobody else; any price increase can have serious consequences.
Workers’ demand for wage increases can lead to a laboor costs downturn, resulting in lower profits for businesses. All this can create a high uncertainty ratio into the system, leading to decreased investment from entrepreneurs. These interest rate increases will affect business owners across the country. The best thing you can do is to understand how these interest rate increases can affect your business.
The Bank of Namibia is expecting on a gradual tightening of monetary policy in a bid to contain inflation and sustain economic growth. It is essential for the Bank to use all available tools to maintain price and exchange rate stability to preserve a good level of economic performance. Higher interest rates may help encourage saving rather than spending and should also help to reduce the pace of bank lending, thereby dampening domestic demand.
To that end, given the fragile state of the local economic recovery, with high unemployment, rising poverty levels and household finances under pressure from rising prices including the prospect of another significant hike in the fuel price, any increase at all in the repo rate would overburden consumers and further dampen the recovery.