Interest rate hike expected

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by Staff Reporter
Windhoek

Capricorn Asset Management says the likelihood of an interest rate increase in Namibia in December increased following the South African reserve bank’s decision to increase interest rates by 25 basis points at their monetary policy meeting last month.

“We now expect the Bank of Namibia (BON) to move in tandem,” said Suta Kavari, Investment Strategist at Capricorn Asset Management (CAM). CAM is a subsidiary of Bank Windhoek Holdings.

“While inflation in South Africa has been relatively subdued, the reserve bank cited sustained inflationary pressures in the medium term in their decision to increase interest rates, with a temporary breach of the bank’s target band expected in the first and fourth quarters of next year. The reserve bank also expects inflation to remain firmly lodged towards the upper band of their target range,” Kavari said.

“Despite the weak economic backdrop, the reserve bank clearly had one eye on the Fed’s widely expected December hike and tried to counteract possibly strong sell-off in the rand.”

According to Kavari the probability of a December rate hike in the US rose to their highest levels after minutes of the US Federal Reserve’s October meeting hinted strongly at the “live possibility” of a December lift-off.
“A rate hike in the US would be echoed by many emerging market central banks, acutely aware of the effects of higher interest rates in the US on domestic currencies, and second-round effects on their inflation outlook.”

“In the absence of inflationary pressures, the Bank of Namibia has largely used interest rate increases to curb the growth in credit extended to households. Inflation is expected to remain fairly benign in the near-term, but risks to the outlook have increased,” said Kavari.

Claire Hobbs, Chief Treasurer at Bank Windhoek said that risks to the inflation outlook include the depreciating currency, water restrictions, and the impact of the continued drought conditions on local food prices.
“While the effects of the ongoing drought on local food prices will only pass through towards the end of the first quarter next year, food prices will start increasing on the back of elevated grain and protein prices in the region,” Hobbs said.

“We believe that BoN will take a pro-cyclical stance and hike interest rates by 25 basis points, with the view of maintaining a healthy rate differential between Namibia and South Africa, cognisant of the liquidity constraint in the market. The BoN’s move would thus pre-empt the Fed’s December rate hike and the reserve bank’s follow-up hike in January. A failure to move at this meeting would possible require more aggressive interest rate increases going forward,” Kavari concluded.

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