Rates won’t ruin X-mas

THE upcoming festive season will not necessarily be marked with reduced spending power by consumers following the latest interest hike by the Bank of Namibia (BoN) imposed last week, a leading local economist has said.

The repo rate was increased by 50 basis points from 8,5 per cent to end the year at nine per cent, in line with market expectations. The Executive Director of the Institute for Public Policy Research (IPPR), Daniel Motinga, yesterday said there would still be many people who would continue to borrow in spite of the higher interest rates.Asked whether hiking interest rates would curtail inflation, Motinga answered: “Yes and no.Yes, increasing the cost of money does in most instances increase the real cost of borrowing cash and therefore leads to lower demand, which in turn leads to low inflation.No, because this does not happen automatically, as there is no spontaneous adjustment process.But, importantly, how people respond to high interest rates is very much a function of people’s asset holdings.”In fact, some economists have argued recently that average household asset-to-debt ratios have improved dramatically in recent year, thus allowing debt-financed consumption to take place which in turn may spur growth and inflation.”He added that the willingness of households to borrow and spend was also a major driver of growth in developing economies – a situation that was sometimes overlooked by monetary policy authorities in their fight against inflation.”So it should not always be about low inflation but also about growth and development,” said Motinga.The main driver of the interest rate hikes this year – with Thursday’s being the fourth – has been surging inflation, which remains a cause of concern for the central bank.”We do not expect the Namibian inflation rate to abate in the immediate future, as more price rises are expected based on the stubborn rise in the South African Production Price Index (PPI),” the bank noted in its monetary policy statement.Earlier in the year, high crude oil prices were behind rising inflation due to increasing fuel costs.Inflation has been on the rise this year, and was recorded at 5,8 per cent in October, up from 5,5 per cent in September.Commercial banks have in turn increased their prime lending rates by 50 basis points from 13,25 per cent to 13,75 per cent, meaning borrowers will have to cough up more to repay their loans.Motinga also noted that since December was traditionally bonus month, most households would probably not feel the full force of the higher interest until early next year.”Rising interest rates of course increase the cost of borrowing, that is overdrafts would become more expensive, but it also helps those households that save, as they are likely to receive higher interest on their savings deposits,” he said.The Executive Director of the Institute for Public Policy Research (IPPR), Daniel Motinga, yesterday said there would still be many people who would continue to borrow in spite of the higher interest rates.Asked whether hiking interest rates would curtail inflation, Motinga answered: “Yes and no.Yes, increasing the cost of money does in most instances increase the real cost of borrowing cash and therefore leads to lower demand, which in turn leads to low inflation.No, because this does not happen automatically, as there is no spontaneous adjustment process.But, importantly, how people respond to high interest rates is very much a function of people’s asset holdings.”In fact, some economists have argued recently that average household asset-to-debt ratios have improved dramatically in recent year, thus allowing debt-financed consumption to take place which in turn may spur growth and inflation.”He added that the willingness of households to borrow and spend was also a major driver of growth in developing economies – a situation that was sometimes overlooked by monetary policy authorities in their fight against inflation.”So it should not always be about low inflation but also about growth and development,” said Motinga.The main driver of the interest rate hikes this year – with Thursday’s being the fourth – has been surging inflation, which remains a cause of concern for the central bank.”We do not expect the Namibian inflation rate to abate in the immediate future, as more price rises are expected based on the stubborn rise in the South African Production Price Index (PPI),” the bank noted in its monetary policy statement.Earlier in the year, high crude oil prices were behind rising inflation due to increasing fuel costs.Inflation has been on the rise this year, and was recorded at 5,8 per cent in October, up from 5,5 per cent in September.Commercial banks have in turn increased their prime lending rates by 50 basis points from 13,25 per cent to 13,75 per cent, meaning borrowers will have to cough up more to repay their loans.Motinga also noted that since December was traditionally bonus month, most households would probably not feel the full force of the higher interest until early next year.”Rising interest rates of course increase the cost of borrowing, that is overdrafts would become more expensive, but it also helps those households that save, as they are likely to receive higher interest on their savings deposits,” he said.