Higher borrowing costs imminent with another interest rate hike on the horizon
By Josef Kefas Sheehama.
The Bank of Namibia is expected to raise interest rates by 50 basis points on 19 April 2023 to curtail ravaging inflation and a fast depreciating Namibia Dollar. We are expecting the Bank of Namibia to continue raising interest rates over the medium term.
In my view as Independent Economics and Business Researcher I strongly believe that the Monetary Policy Committee will increase the repurchase rate by 50 basis points if not 75 basis points.
When it comes to the direct impact of these moves, increases in interest rates will create higher mortgage repayments, especially for new borrowers as well as those on variable rates. This will mean people have less money to spend elsewhere. Increasing inflation and therefore uncertainty about the future can also lead to reduced consumer and business confidence, dragging down household and business spending even further. Therefore, business and startup owners in the country will have a hard time dealing with rising inflation, higher borrowing rates and a fast depreciating currency as ease of doing business worsens across the economy.
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 2023, money will become more expensive. 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.
The Small and Medium Enterprises (SMEs) may feel the pain of rapid interest rate rises, for the impact of tighter credit conditions exacerbated by economic turmoil. As financing costs jump and become harder to access, the risk of a spike in default rates is becoming increasingly tangible. Liquidity is the life blood of any SME, making cash flow more important than the magnitude of the profit or the return on investment.
Therefore, the government recognizes that many of us do some sort of micro or small business so creating an enabling environment for all SMEs to thrive is cardinal. Hence, the Bank of Namibia and the Ministry of Finance and Public Enterprises have re-launched the SME Economic Recovery Loan Scheme on 02 February 2023 with a share capital of N$500 million to enhance liquidity. The commercial banks as facilitators are awaiting loan applications from N$50,000.00 to N$10million based on the SME’s balance sheet and subject to the bank’s credit assessment, according to Bank of Namibia. The loan amount is linked to current prime lending rate which is 10.50%, however, the Bank of Namibia proposed prime lending rate minus 50 basis points. The six-month moratorium for affected Small and Medium Enterprises (SMEs) is perceived as medium to long term solutions in the fragile economy.
Moreover, the current expectations are that inflation and interest rates will remain undesirably high for some time. The Bank of Namibia will play a major role in striking the balance needed to bring down the cost of living without stalling the economy. Furthermore, the Namibian economy is closely linked to South Africa, with the Namibia dollar pegged one-to-one to the South African Rand. The South African Reserve Bank’s Monetary Policy Committee increased the repo rate by 50 basis points on 30 March 2023. This means that Namibia must increase its repo rate to strike balance.
The South Africa’s Repo Rate stands at 7.75% compare to the Namibian Repo Rate at 7%. This resulted in a difference of 0.75%. It should be noted that although much of this inflationary pressure is supply-side based, there is merit in increasing interest rates as a tool to try to slow down inflation. The fundamental debates about inflation are really concerned with whether the central bank is an inflation creator or an inflation fighter. The responsibility of monetary policymakers is to adequately respond to inflation. Those who see the central bank as an inflation fighter must therefore believe that inflation has some source other than the central bank, that it has nonmonetary factors. The job of the central bank is to adjust its policy in response to these shocks.
Futhermore, volatility in global commodity prices and ongoing supply chain disruptions will continue to stoke price pressures. The result will be even higher costs for businesses, and a deep squeeze in the cost of living for households. It is exceptionally hard to say what this will mean for headline inflation in the coming years because there is elevated uncertainty about exactly where key commodity prices such as oil and others will settle. There is also massive uncertainty about the impact of various supply chain disruptions and the degree to which businesses can pass on their higher input costs to consumers in the face of a significant negative demand and confidence shock.
The biggest uncertainty for the trajectory of headline CPI, in my view, is exactly where prices will go, given that for years to come, the market is now likely to be precariously balanced, deeply disjointed and volatile.
In conclusion, given fragile economic conditions, any new adverse development such as higher-than-expected inflation, abrupt rises in interest rates to contain it, and escalating geopolitical tensions could push the global economy into recession. According to the World Bank Group President, David Malpass, the global economy is projected to grow by 1.7% in 2023 and 2.7% in 2024. The sharp downturn in growth is expected to be widespread, with forecasts in 2023 revised down for 95% of advanced economies and nearly 70% of emerging market and developing economies.
Therefore, with higher interest rates, interest payments on loans are more expensive. This discourages people from borrowing and spending. People who already have loans will have less disposable income because they spend more on interest payments.
Interest rates also affect consumer and business confidence. A rise in interest rates discourages investment, it makes businesses and consumers less willing to take out risky investments or make purchases. Hence, other areas of consumption will also fall.