CUMULATIVELY, the Bank of Namibia cut the general cost of money to commercial banks by 2,75 percentage points since June 2019 from 6,75% to 4% in June 2020.
Commercial banks have passed on the cuts to clients through the mortgage lending rate which was equally reduced from 11,50% in June 2019 to 8,75% in June 2020 and through the prime lending rate.
“At this rate, the interest rate remains the lowest in history, First Capital said.
This did not come as a surprise given the recent global trend of easing policy, moderating domestic inflation trending at historical low levels (2,1 % in June 2020).
The same level of annual inflation (2,1%) is recorded at the end of July 2020, better than last year when prices were edging up faster at 3,6%, at the end of July 2019 while on a monthly basis, the inflation rate remained unchanged at 0,2%.
“This was because of a clear absence of demand pressures on prices and the need to support economic activities,” First Capital analysis said.
The central bank always based its monetary decision on maintaining a stable inflation environment in the country.
Apart from the cost of borrowing which fell significantly even though it was met with a low appetite of borrowing from both household and business, credit statistics have taken the opposite direction.
On an annual basis credit extended to the business community continues to decline – decreasing with 3,6% for all categories, compared to other loans and advances which grew by 8,1%.
The focus now is on the benefit of the indebted households and businesses due to the fact that an interest rate cut for those with mortgage instalments and other loan repayments has accumulated into slight/more savings depending on the size of the principal debt.
The 12 months of cuts could be beneficial to indebted households as the ratio of household indebtedness to disposable income increased due to subdued growth in disposable income.
According to the 2020 Financial Stability Report, household debt to disposable income ratio increased to 97,7% in 2019 from 92,9% in 2018 as credit extended to individuals continued to rise, while disposable income stagnates.
According to the First Capital analysis on their latest Building Cost Index report, cumulatively the rate cuts between June 2019 and June 2020 reduced mortgage instalments by 17,1%.
Aggregating the cuts for the last 12 months, the analysis pointed that “instalments will significantly move for consumers with high debt repayment”.
Using a mortgage loan of N$500 000, an individual will be saving 17,1% or N$914 compared to a year ago.
With a higher loan of N$1,1 million, households will save N$2 010 in installments while on a N$2,5 million loan, N$4,568 will be saved.
The analysts also added that the savers will not be losing as is traditionally viewed when interest rates are very low, as in the current case.
They based their argument on the fact that the low inflation rate which is also projected to remain lower and the limited demand, pressures would mean “in the short to medium term thereby still enabling savers to realise positive real returns”.
However, the rewards will be different for savers on bank accounts than on investment accounts.
Early this month a Bottomline analysis reported that the average interest a person can earn from saving money with any commercial bank is around 3,95% – the lowest it has been in a very long time.
However, on average the bank can lend you your money for consumption or for business purposes at around 7,68%, statistics from the Bank of Namibia show.
Commenting on the interest rate outlook, the First Capital analysts said recent trends in monetary policy direction suggest that the global easing circle could be nearing its end.
“Given the recent experience of synchronised policy directions across global central banks, it gets likely that domestic interest rates could trough at these low levels as policy directions balance the costs and benefits of further reducing interest rates on various economic players,” they stated.
On that note the monetary policy committee will announce the outcome of their fourth deliberation this year on how they will utilise the country’s cost of money as an instrument to stimulate growth.
This will be done on top of South Africa, the anchor country to the Namibia dollar, who reduced their benchmark rate by 25 basis points to 3,25% at the end of July 2020.
