Martin Endjala
The real repo rate in Namibia is currently at 1.45 percent and is deemed to be less restrictive compared to real central bank policy rates in other emerging markets.
Economist, Theo Klein, told this publication that the real repo rate in Namibia has been positive since April 2023 because the monetary policy has been restrictive for the last two and a half months.
“Due to the lag effect of monetary policy, the cumulative 300bps hikes from December 2021 to December 2022 have not had an impact on the real economy as yet,” said Klein.
He said further rate hikes during 2023 would add to the negative impacts of the 300bps hikes from 2022 and would weigh on economic activity in 2024.
With the recent MPC meeting announcement, Klein says that the Bank of Namibia continues its deviation from South African Reserve Bank’s (SARB) repo rate which started in August 2022.
Members of the Southern African Common Monetary Area which consists of South Africa, Lesotho, Eswatini and Namibia, have all deviated from the South African Reserve Bank’s interest rate path and there have been fairly large divergences.
“One would normally expect these rates to be closely in line with SARB’s repo rate. By mid-June 2023, both Namibia and Eswatini’s policy rates are 50bps below South Africa’s, while Lesotho’s policy rate is 75bps lower,” Klein said.
He says it is difficult to predict the future path of monetary policy, but it seems deviations from SARB could likely continue.
One argument might be that central bank policy rates are kept constant until SARB starts cutting rates. In this way, SARB’s repo rate converges to central bank policy rates in Namibia, Eswatini and Lesotho.
The other argument is that South Africa continues to hike and so the hand of these countries will be forced to move in line with SARB and eventually have their central bank policy rates converge to SARB’s repo rate.
With monetary policy already being restrictive, even tighter financial conditions will weigh on economic growth in the region and taken together with a weaker external business environment, risks to SACU revenue could abound in the medium term as rates continue to rise.
Klein noted that Namibia’s inflation rates largely remain below that of South Africa while the country’s foreign currency reserves remain at an all-time high.
South Africa’s May 2023 inflation data will only be released later this month.
He argued that Namibia’s repo rate could have deviated from South Africa for a longer time and provided somewhat short-term relief to households and businesses.
Going forward, he expects that rates will remain unchanged on 14 June 2023. This could in all likelihood lead the SARB to keep rates unchanged in their July 2023 meeting.
He is of the view that no further rate hikes in Namibia will take place for the remainder of 2023.
While financial conditions are not excessively restrictive compared to past hiking cycles, the monetary policy is restrictive at the moment and runs the risk of weighing on economic activity in Namibia.
The current rate hiking cycle is less aggressive than the hiking cycle of 1998 in terms of the basis point magnitude of total cumulative rate hikes.
In 1998, the repo rate was hiked by a cumulative 525bps (from 16 percent to 21.25 percent, whereas the repo rate was hiked by a cumulative 400bps between December 2021 and June 2023.
Interestingly, the hiking cycle of 2002 and 2006 were both 350bps in cumulative rate hikes.
“Of course, the current rate hiking cycle is not over yet and if our expectations are correct, the current hiking cycle will be the second most aggressive in terms of rate hike magnitudes,” explained Klein.
Current foreign currency reserves stand at N$49.7 billion and are sufficient for 5.2 months of import cover.
The bank maintains its GDP growth forecast for 2023 at 3.0 percent. Risks to local economic activity remain weaker global growth, rising inflation and interest rates in our trading partner countries, water supply interruptions and the looming drought. The bank also maintained its inflation forecast for 2023 at 6.1 percent.
While domestic financial conditions have tightened since the start of the rate hiking cycle, they are not excessively restrictive compared to the current rate hiking cycle to past hiking cycles.
A rate hiking cycle is defined as the period between the month of the first rate hike and the month in which the terminal rate was reached. The terminal rate we define as the maximum rate reached in a hiking cycle.
The current hiking cycle is the third fastest cycle in terms of how fast interest rates rose for a set number of months.
The longest hiking cycle lasted 28 months (1994 to 1997) and the shortest hiking cycle was in 1998 when the Bank of Namibia hiked the repo rate by 275bps in one meeting alone which took the repo rate from 18 percent to 20.75 percent in that year.
