Effect of exchange rate changes on domestic inflation low



The Bank of Namibia’s paper examining how changes in the exchange rate affects local inflation concluded that the exchange rate pass-through to inflation is low.

The paper was presented at a seminar held at the Bank of Namibia on Tuesday. The seminar was attended by senior government officials, members of the business fraternity, economists, members of the academic community and the media, and moderated by Florette Nakusera, Director of Research at the Bank of Namibia.

The paper was jointly authored by Dr Postrick Mushendami, Deputy Director at the Research Department and Heinrich Namakalu, economist at the same department. The results of the research paper were presented by Mushendami.

The exchange rate pass-through (ERPT) is defined as the effect of a one percent change in the exchange rate on domestic inflation.
In his welcoming remarks, the Director of Strategic Communications and Financial Sector Development, Ndangi Katoma, said that “the event was intended to encourage debate and inform policymakers regarding the factors that impact inflation”. He noted that exchange rate pass-through is an important consideration with respect to monetary policy formulation in any given economy and most especially for Namibia, “given our specific situation”.

In his presentation Mushendami elaborated that currency depreciation can have both direct and indirect effects on the economy. The direct effects work through the following channel: Firstly, prices of finished imported goods become expensive due to the reduced purchasing power of the currency. Secondly, the prices of imported raw materials used in the production process may also become expensive. This therefore stresses the importance of ERPT in monetary policy formulation.

The paper concluded that the exchange rate pass-through to inflation is very low and incomplete. These results can be ascribed to the pricing-to-market strategy of Namibian importers. Moreover, the paper found that imported inflation, South African food inflation and oil prices tend to have significantly more effects on inflation in Namibia than the exchange rate.

The results further suggest that to forecast consumer inflation in Namibia, a significant weight should be placed on imported inflation, South African food inflation, oil prices and the exchange rate. By reducing domestic demand, monetary policy can reduce both imported and overall inflation. The paper was authored in 2015 based on data emanating from 2000 to 2014.


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