Bank of Namibia expected to cut repo rate by 25bps as inflation cools

At its first Monetary Policy Committee (MPC) meeting of 2024 today, the Bank of Namibia (BoN) is expected to cut its repo rate by 25 basis points (bps).

This will bring its key lending rate to 7,5%, bringing the prime rate to 11,25% and putting Namibia 75bps behind South Africa.

The decision reflects the central bank’s ongoing view that the current repo rate is appropriate to support the domestic economy and to ease consumer burdens.

Meanwhile, inflationary pressures will further encourage BoN to tighten its monetary policy.

Inflation is lower than it was a year ago but you may not be feeling any less frustrated when you pay your bills.

Inflation reduced from 7% to 5,4% in 2024.

We need to understand that prices across all goods and services haven’t actually gone down. Instead, the pace of price increases slowed from a year ago.

Overall, prices are still high.

The reduction in interest rate will certainly ease pressure on every single Namibian.

A change in the repo rate will affect those with loans from commercial banks, such as personal loans, home loans, or car loans.

This is because it is linked to the prime interest rate, which is the interest rate used by banks to calculate the loan repayment for customers who are borrowing.

Therefore, for an ordinary citizen, or those consumers who are really struggling to keep their heads above water in terms of paying their debts, this will make it a little bit easier.

It will also allow individuals to borrow more cheaply if they need to.

However, borrowing should be driven by needs, not wants.

Furthermore, downward trajectory inflation is still not good enough as the market is very volatile.

The sanctions on Russia by the United States of America and United Kingdom have contributed to the increase in crude oil prices.

The Middle East unrest is a matter of concern, while ongoing geopolitics is a serious concern and will influence market vitality.

So, we need to be careful about making proclamations about the future.

Things have surprised us a lot.

In my view as an independent economics and business analyst, I strongly believe that BoN’s MPC will reduce the repurchase rate by 25bps.

Moreover, the fundamental debates about inflation are really concerned with whether the central bank is an inflation creator or an inflation fighter. The responsibility of monetary policymakers is to adequately respond to inflation.

Those who see the central bank as an inflation fighter must, therefore, believe that inflation has some source other than the central bank .

The job of the central bank is to adjust its policy in response to these shocks.

Furthermore, inadequate supply of locally produced and imported commodities, the high price of imported commodities and goods arising from increases in foreign prices bring instability to foreign exchange, thereby effecting our economy and its growth.

However, higher interest rates and inflation rates would push up consumer financial vulnerability.

Additionally, the stable cost of living is moderating expectations that BoN will look to cut interest rates.

The MPC is faced with a difficult trade-off between ensuring financial stability and helping households cope with a cost of living crisis that is set to further squeeze household finances over a difficult period.

It’s not just the cost of living that is increasing, so is the cost of going to work, and salary increases may not be enough to cover the cost of returning to normality.

The upside surprises to both the headline and core inflation readings would further BoN’s discomfort with its current policy stance.

There is no doubt that prices are being boosted by factors that should moderate in time, including surging energy costs and supply chain problems, but in the near term, consumers are still going to feel the pinch as price increases may get worse before they get better, particularly with the energy price cap set to increase.

Therefore, it is important for BoN to cut the repo rate to avoid financial distress for consumers.

Furthermore, we expect BoN to use the appropriate methodology today, however, it noted that it is exceptionally hard to say what this will mean for headline inflation in the coming years, because there is exceptionally elevated uncertainty about exactly where key commodity prices such as oil and grains will settle.

There is also massive uncertainty about the impact of various supply chain disruptions and the degree to which firms can pass on their higher input costs to consumers in the face of a significant negative demand and confidence shock.

The biggest uncertainty for the trajectory of the headline Consumer Price Index (CPI), in my view, is exactly where oil prices will go, given that for years to come, the market for crude is likely to be precariously balanced, deeply disjointed and volatile.

Despite stronger food price inflation and core inflation into early 2024, lower oil prices and base effects would see headline CPI decline.

This is a trajectory which is considerably lower than previous years, but emphasises that the breach of target is likely to be brief and limited, and inflation is likely to still trend down out to 2024, assuming oil prices behave in line with my assumption.

In conclusion, Namibia’s economic rebound is expected to continue, albeit at a slower rate, as policy stimulus fades and terms of trade retreat from the recent record highs. Inflation is expected to moderate, supporting a gradual rate decline cycle.

Namibia expects a 25bps cut over the course of the year, while persistent idiosyncratic risks remain, particularly electricity disruptions and high levels of unemployment. If structural reforms were accelerated, it could boost confidence, investment and drive faster growth.

Regarding inflation, the invasion of Ukraine by Russia, the Israel-Gaza conflict and attacks on commercial ships in the Red Sea have led to further volatilities in energy and other commodity prices, including food prices.

It is also likely to exacerbate global supply chain disruptions and has increased the uncertainty around the economic outlook significantly.

Despite these, BoN rate cuts are designed to lower interest rates throughout the economy and make it cheaper to borrow money.

• Josef Sheehama is an independent economic and business researcher.