The Bank of Namibia (BoN) on Wednesday announced that the repo rate will increase by another 25 basis points to 7 percent. This means the prime lending rate at banks will increase to 10.5 percent.
“Amidst a slowing economic backdrop both locally and internationally, tighter monetary policy was needed to realign to regional interest rates within the Common Monetary Area and prevent potential capital outflows. Palatable reserves and deceleration in private sector credit extension supported the gradual hiking cycle,” remarked Namene Kalili, senior manager of research and development of FNB Holdings.
“Private sector credit extensions has fully reacted to the overall 150bps hike since 2014, with annual growth decelerating to 13.2 percent, lower than the 2015 average of 16.2 percent. The household credit, however, remains under close scrutiny as installment credit and mortgage loans propped up annual growth to 13.1 percent from 12.3 percent during the same period last year.
“Bearing in mind the overall hawkish view of the BoN, we continue to expect gradual interest rate hikes over the next year in reaction to the SARB, as the local fundamentals remain favourable,” he said.
Higher lending rates raise the cost of capital and, therefore, discourage borrowing, while increasing lending rates encourages savings, as the returns on investment increase without additional effort or risk. “Not only do the returns increase on the capital invested, but re-invested returns generate compound interest,” Kalili explained. He said the bank’s outlook for the Namibian economy in 2016 remains “cautiously optimistic”, with growth expected to decelerate to 3.1 percent.
“Adding to this economic pressure, rising inflation is expected to erode real purchasing power of consumers, while higher interest rates erode disposable income. We furthermore face the effects of the southern Africa drought, which will push up food prices significantly.” According to Kalili, cash is king and building cash buffers can mitigate against uncertainties at zero risk to the capital amount, while providing attractive inflation-bearing returns that ensure that savers’ asset base increase in real terms.