By Mbatjiua Ngavirue
The bad news about increasing inflation and interest rates is that there are no signs the pain for consumers is going to end any time soon.
This indication came from Bank of Namibia (BoN) Assistant Governor Ipumbu Shiimi when responding to questions after announcing the half percent increase last Thursday.
Since the last Monetary Policy meeting in June this year, the outlook on inflation had deteriorated further.
Despite tighter domestic monetary conditions, inflation picked up to 7.2 percent in July from 7.0 percent in June 2007.
In light of this, the BoN increased the bank rate from 9,5 to 10 percent.
Bank Windhoek responded first by announcing an increase in the prime lending rate of 50 basis points from 14.25% p.a. to 14.75% p.a.
The bank also increased its mortgage loan rate by the same amount from 14.25% p.a. to 14.75% p.a., both with effect from Friday, 17 August 2007.
Shiimi said external factors such as food and transport costs were responsible for inflation, and were therefore largely outside the bank’s control.
“There is not much that can be done to reduce pressure from food and oil. They are outside our control.
“We are not able to say whether there will be further increases in interest rates. That depends on how inflation behaves.”
Shiimi said food accounts for 28 percent of the Consumer Price Index (CPI) basket.
If food prices continued to rise, then inflation would also continue to rise.
The diversion of increasing amounts of grain for bio-fuel played a part in causing the current shortage of maize, he noted.
In addition to the external factors, consumer behaviour also had a significant impact on inflation and interest rates.
“The pain will only end when consumers start to behave. The rate of credit is down, but is still high at 13 percent.
“We need to send a message to consumers to curb their appetite for credit,” he said.
The BoN said it was also encouraging to note that the bulk of the increase in credit extension occurred in the mortgage category, while the growth in instalment credit decelerated.
“It is worth noting that growth in mortgage credit expanded at a healthy rate of 26.5 percent during June 2007, albeit slower than the 27.1 percent recorded in March 2007.”
Shiimi conceded that default rates among mortgage bond holders had increased at a slightly higher rate than for other credit, although nowhere near worrying levels.
The rate of non-performing loans in general within the banking industry currently stands at 3 percent.
Bankers consider 3 percent still a healthy level, and well below the internationally accepted 5 percent ceiling when warning bells start ringing.
The BoN said that in line with decelerated growth in credit extension, there were also signs of slowdown in other demand indicators.
This included moderation in new vehicle sales, for which growth slowed to a monthly rate of 4.2 percent and an annual rate of 3.1 percent during July 2007. The comparative rates in June were 17.0 percent and 3.3 percent, respectively.