Inevitable Interest Squeeze Follows


By Mbatjiua Ngavirue


Following the Bank of Namibia’s (BoN) announcement of a half percentage point increase in the repo rate last Thursday, all four major commercial banks followed suit by increasing their lending rates by a corresponding amount.

The BoN increase became effective Friday, June 8, with First National Bank and Bank Windhoek quick on the trigger, announcing increases the same day.

Standard Bank and Nedbank gave clients two days’ relief with their increases only implemented on Monday June 11.

Across the board the banks increased prime lending rates from 13,75% to 14,25% a year.

Home loan base rates also increased to 14,25%, with Standard Bank indicating the new rate would also be applicable to its vehicle and asset finance rate.
The latest increase in the bank rate is the fifth since the beginning of 2006, adding up to a 2,5% increase for the period.

“A 2,5% increase over one and half years is quite significant. It does hit your pocket, because your disposable income is reduced by quite a substantial amount,” RMB Portfolio Manager and Economist Martin Mwinga said.

According to Mwinga, it would for example mean that someone paying a housing bond of N$4 000 a month at the beginning of 2006 would now pay N$5 500 a month, or an extra N$1 500 a month.

Nedbank gave an example of what the current increase from 13,75% to 14,75% would mean to a homeowner at the lower end of the market.

The monthly bond repayment on a house purchased for N$500 000 would have been N$6 126 a month over 240 months or 20 years.

At the new rate of 14,25%, the monthly instalment increases to N$6 307,58, or an extra N$185,50 a month.

Announcing the increase last week Deputy Governor of the Bank of Namibia, Paul Hartman, said the bank considered the risks to the outlook for inflation in the medium term to remain tilted to the upside.

This resulted from inflationary pressures expected to persist mainly because of volatile crude oil prices and expected increases in prices in the second half of the year.

“There is therefore a need for public utilities to exercise some restraint when considering increases in prices in order to contain further inflationary pressures,” he cautioned.

A statement from BoN said that during a review of recent economic developments, the bank became concerned about the increase in inflation since its last monetary policy meeting.

Growth in domestic demand seemed to be abating as shown by slowing growth in private sector credit extension and the number of vehicles sold.

“Nevertheless, rising food prices and uncertainties about regional weather conditions that could reduce agricultural output, the volatile exchange rate and international oil prices continue to pose major risks to the domestic inflation outlook,” the BoN said.

The Bank of Namibia also expressed concern over the risk of second-round effects from food and oil price inflation on the overall level of inflation.

“Moreover, current economic performance is robust enough to be able to absorb tighter monetary conditions without significant negative impact,” the central bank however argued.

RMB’s Mwinga however pointed out that while everyone’s living expenses were increasing, people’s incomes were not rising fast enough to keep pace and people were therefore becoming poorer.

Although he acknowledged the BoN aimed the interest rate hike at curbing credit extension, he appeared sceptical about the power of interest rates to change human behaviour.

“It’s like crime. You have the police, but people still commit crime. People will just borrow more money and get more heavily into debt,” he pessimistically predicted.

If Mwinga’s prediction proves accurate, it can only mean more future pain for Namibian consumers, as it will force the BoN to turn the screws even harder.

There would nevertheless be some decrease in consumer spending, which accounts for over 70 percent of the country’s GDP.

“Once consumer spending drops, the economy will inevitably contract.

Government revenue will fall, so there will also be pressure on the government to find new revenue sources,” he noted.

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