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

By Josef Kefas Sheehama

At its first Monetary Policy Committee meeting of 2024, on the 14 February 2024, the Bank of Namibia is expected to cut its Repo Rate by 25 basis points.

All of Namibian’s banks now expect the Bank of Namibia to cut its Repo Rate target by 0.25 basis points on the 14 February 2024, which would bring its key lending rate to 7.50%. This brings the prime rate to 11.25%. Namibia will be 75 basis points 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 the Bank of Namibia 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 reduce from 7% to 5.40% 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.

These reduction in interest rate will certainly ease on every single Namibian. A change in the repo rate will affect people who have borrowed any form of a loan from the 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 the banks to calculate the loan repayment for customers who are borrowing. Therefore, for an ordinary citizen, or those consumers that are really struggling to keep their heads above water in terms of paying their debts, this will make it a little bit easier to pay their debts. It will also allow individuals to borrow more cheaply if they needed to. However, borrowing should be driven by the needs not the wants.

Furthermore, downward trajectory inflation still not good enough as market is very volatile. The sanctions on Russia by the USA and UK which have contributed to the increase in crude oil prices. The Middle East unrest is a matter of concern. The ongoing geopolitics is serious concern and this 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 independent economics and business analyst I strongly believe that the Monetary Policy Committee of the Bank of Namibia will reduce the repurchase rate by 25 basis points.

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, that it has nonmonetary factors. 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, the high price of imported goods arising from increases in foreign prices being instability of foreign exchange, thereby effecting our economy and its growth. However, higher interest rates and inflation rates would push up consumer financial vulnerability.

Additionally, stable cost of living is moderating expectations that the Bank of Namibia 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 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 salaries 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 the Bank of Namibia’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 the Bank of Namibia to cut Repo Rate to avoid financial distress for consumers.

Furthermore, we expects the Bank of Namibia to use appropriate methodology on the 14 February 2024. 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 headline CPI, in my view, is exactly where oil prices will go, given that for years to come, the market for crude is now 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 year, but emphasize 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 expect 25 basis point cut over the course of the year.

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, Israel –Gaza and an attack on commercial ship in Red Sea have led to further large volatile 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, Bank of Namibia rate cuts are designed to lower interest rates throughout the economy and make it cheaper to borrow money.