Economists expect more rate relief from BoN today

CHANCES are good that the Bank of Namibia (BoN) will kick-start another interest rate reduction this morning in an effort to stimulate the lagging economy and relieve the burden on consumers further.

By how much is still an open question though.
A survey by The Namibian shows that economists on the conservative side expect the repo rate to drop by between 0,5 and one percentage point. However, there is an outside chance that BoN Governor Tom Alweendo might slash the rate by 1,5 or even two percentage points, others speculate.
All the macroeconomic fundamentals justify a repo rate cut, which the local commercial banks will see as a cue to drop their prime lending rates.
The public’s appetite for credit has been sufficiently suppressed by more than a year of tight monetary policy.
Although individual borrowing at the end of the fourth quarter last year stood at four per cent, up from two per cent in the third quarter, it remains well within the target range. Bad debt has also declined, the BoN’s latest Quarterly Report shows.
Namibia’s international reserves, one of the major determining factors for lowering rates, continue to be at record heights.
The latest BoN figures show that that international reserves stood at nearly N$13 billion at the end of 2008. This is more than enough to sustain Namibia’s currency peg, which requires that the domestic currency in circulation should be fully backed by international reserves.
However, this will not be enough to convince Governor Alweendo to significantly cut rates, Daniel Motinga, Senior Manager of Research and Development at FNB Namibia, believes.
He maintains that the BoN ‘will err on the side of caution and cut rates by 50 basis points only, given the adverse reserve outlook as Government intends to use its cash balances to ring down debt levels’. The Governor’s decision will furthermore be influenced by the challenges faced by the diamond industry and the major risk it poses to foreign exchange earnings in the interim, Motinga feels.
Simonis Storm Securities economist Emile van Zyl expects a drop of one percentage point in the repo rate.
‘But don’t be too surprised if the BoN decreases the rate by 1,5 or even two percentage points,’ he added.
Van Zyl bases this optimistic assumption on the fact that the South African Reserve Bank (SARB) now adjusts its rate monthly to better cope with the impact of the rapid changes in the global financial environment on the South African economy. Although moving its rate announcement dates a week earlier, the BoN did not follow the SARB’s example.
While the SARB dropped its repo to 9,5 per cent on March 24, the BoN’s remained at 9 per cent. Consequently, commercial banks in South Africa lower their prime interest rate to 13 per cent, while that of Namibia remained at 13,75 per cent. For the first time since May last year, Namibians therefore had to borrow money from local commercial banks at a higher interest rate than in South Africa.
The SARB’s will again review its repo at the end of April, with economists expecting yet another decrease of one percentage point.
‘To stop the rate gap between the two countries from becoming too big, the BoN might cut its repo by between 1,5 and two percentage points,’ Van Zyl said.
Investment House Namibia (IHN) also expects a huge cut in rates.
In their Daily Market Analysis, IHN forecasts a repo rate of 7 per cent for April.
If Governor Alweendo decreases the repo, or the rate at which commercial banks borrow money from the BoN, it will be the third cut since December. Rates have dropped by 1,5 percentage points so far, after peaking at 10,5 per cent from October 2007 to November last year.
jo-mare@namibian.com.na