Rate decision will be a ‘close call’: Steytler

THE interest rate decision that the Executive Committee (EC) of the Bank of Namibia (BoN) will take in two weeks’ time is going to a ‘close call’ taking into account the latest credit growth figures, Bank Windhoek economist John Steytler said yesterday.

‘On the one hand, the near-term inflation outlook and the weakening in credit conditions, albeit only moderate, supplemented by the recent easing in monetary conditions in South Africa raises the probability of a further relaxation in monetary policy in Namibia.
‘On the other hand, credit growth in Namibia remains strong in relative terms, and since monetary policy is supposed to be forward looking, supplemented by a decrease in international reserves, the BoN might well decide to keep its policy rate unchanged in the near-term with a possibility of monetary tightening in the second half of 2011. Overall we therefore expect a neutral monetary policy stance, with an increased probability of a reduction in the repo rate at the next EC meeting of the BoN,’ Steytler said.
Analysing the August figures, Steytler said the annual growth rate of broadly defined money supply (M2), which includes currency in the hands of the public, transferable deposits and other deposits, accelerated to 9,6 per cent during the month, up from 5,7 per cent in July.
‘The increase in money supply can be attributed to credit extended to the private sector by banking institutions, which increased on an annual basis by 10,8 per cent during the month of August, as well as a significant reduction in net claims on the central government to the tune of N$3,1 billion compared to one year earlier,’ he said.
On the other hand, net foreign assets of the banking system exerted a contracting effect on money supply as it declined by 8,1 per cent on an annual basis during the month of August.
Credit extended to the private sector in August slowed to 10,8 per cent on an annual basis compared to 11,4 per cent in July. According to the BoN the slower growth in credit extension is due to the repayment of short-term overdraft facilities by business corporations in August.
Steytler said notwithstanding a drop in the annual inflation rate to 3,6 per cent, in real terms growth in total private sector credit slowed to 6,5 per cent in August from 6,8 percent in July.
‘This can be attributed to the fact that the magnitude of the slowdown in the inflation rate was smaller than the slowdown in the nominal growth rate of private sector credit. It can also be attributed to the fact that the real interest rate increased by a full one percentage point to 3,40 per cent during the month under review, making it more expensive in real terms to take up credit,’ he said.
The slowdown in credit extension was mainly reflected in business credit which slacked to 13,9 per cent during August from an increase of 18 per cent the month before.
On the hand, the annual growth rate in credit to the household sector improved moderately to 8,0 per cent from 7,8 per cent during the previous month. The annual growth rate of credit to the mortgage sector moderated to 10,8 per cent during August from 10,9 per cent in July.
According to the BoN, the moderation was reflected mainly among households, while the business sector recorded a moderate increase compared to the previous month, Steytler said.
Instalment credit, which is mainly earmarked for vehicle asset financing, increased on an annual basis by 7,0 per cent in August from 6,1 per cent in July. New vehicle sales In August rose on an annual basis by 14,7 per cent, Steytler said.