Brace for more rate hikes

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Investment strategist at Capricorn Asset Management Suta Kavari

When the Bank of Namibia decided to raise its benchmark repo rate by 25 basis points at their April policy meeting, taking the repo rate from 6.75 percent to 7 percent and subsequently the lending rate from 10.5 percent to 10.75 percent, it was broadly in line with Capricorn Asset Management’s expectations.

The latest rate hike was largely in keeping with the South African Reserve Bank’s 25 basis points hike in March. The hike also followed the 25 basis points in February, which was also in response to the South African Reserve Bank’s 50 basis points increase in January.

The decision to hike interest rates was taken with a view to sustaining the currency peg and the need to align Namibia’s interest rates with that of South Africa.

Cognizant of maintaining a healthy rate differential between the two countries, Bank of Namibia was also mindful of the keeping liquidity in the local market and preventing capital outflows, which could have put pressure on the country’s external position.

The BoN embarked on its monetary tightening cycle in June 2014 in order to slow growth in installment credit extended to households. Since mid-last year growth in installment credit extended to households has moderated.

As a result, future interest rate increases in Namibia will be dictated by the South African Reserve Bank’s rate hiking cycle.

Interest rate increases in South Africa have been as a result of the high-risk and volatile environment that have forced the South Africa Reserve Bank to manage the perceived risks to their inflation outlook. The inflation profile for South Africa, and by extension Namibia, has markedly deteriorated, with upward inflationary pressures likely to persist throughout 2016 and early 2017.

Inflation is expected to peak at 7.3 percent in the fourth quarter of this year, down from 7.8 percent, and to return within the 3 to 6 percent target band at 5.5 percent during the fourth quarter of next year.

South African inflation is expected to breach the Reserve Bank’s target band and remain fairly elevated for a prolonged period of time, peaking at 7.3 percent in the fourth quarter of this year.

This latest interest rate increase is of course terrible news for poorer Namibian consumer. Consumers with high levels of indebtedness will be hard hit as interest rate go up.

Rising inflation in the country is starting to eat into consumers’ real disposable income. Add to the mix, increases in water and electricity tariffs and the outlook for the consumer becomes dire.

Going forward, we expect two more interest rate increases this year, taking the repo and prime rates to 7.5 percent and 11.25 percent respectively, after which we expect a normalisation in rates and a moderation in the country’s inflation profile in 2017.

 

 

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