Tuesday 11 May 2021
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Interest rate hike vs Interest rate alignment


…BoN must choose wisely

Bank of Namibia will face a tough policy decision on the 12th of April 2016 when they sit to review the monetary policy stance for the coming two months. From the last time the MPC met (17th February 2015) underlying economic and financial conditions have become even more challenging making monetary policy choices harder. When the Bank of Namibia sit on the Tuesday, the 12th of April 2016 to weigh in on the most appropriate monetary policy stance they will be faced with choosing between raising interest rates (further tightening monetary policy) to curb rising inflation as well as interest rate alignment with South Africa and risk further dampen the domestic economic outlook, thus the Bank must choose carefully!
The Namibian economy is estimated to have slowed down to 5.7 percent in 2015 and weak external demand together with severe drought continues to be a drag on exports. This will hit export-oriented manufacturers and lead to declining industrial
production. The domestic economy will not fare much better in 2016. While these conditions would suggest an easing of monetary policy, which I think is really unlikely. There is a serious concern about
accelerating inflation rate which is more likely going to worsen by the severe drought and weak exchange rate. The poor inflation outlook in Namibia, due to surging food prices and the weaker Rand, will likely convince the Bank’s Monetary Policy Committee (MPC) to hike interest rates by a further 25 basis points when they sit next week.

Annual inflation rate that increased from 5.3 percent in February 2015 to 6.1 percent in February 2016 will be at the centre of the MPCs discussion. Food and transport costs in particular are believed to be driving the number higher, a trend expected to continue given the drought, slightly higher oil prices and persistent currency weakness. The MPC is critically studying the impact of food price shocks on expectations, wages and long-run sticky second-round effects in inflation. This is central to the MPC as inflation does not bode well for either consumers or retailers who are already under pressure, and this suggests that the MPC may opt for another 25 basis-point interest rate. Should this happen, it will be a blow for consumers who already face a rise in the cost of living and already heavily indebted.

The MPC will also consider the domestic growth prospects. Growth numbers released recently points to the fact that unless some kind of stimulus is injected into the economy, 2016 will see weaker growth following a slowdown in 2015. The domestic economy is estimated to have slowed to 5.7% in 2015 compared to the 6.3% recorded in 2014. The slow performance can be attributed to a decline in all industries (the tertiary, secondary and primary industries recorded slower growths of 5.9%, 8% and a decline of 3.1% in real value added). The outlook for 2016 remains uncertain and domestic spending growth is likely to remain subdued. The poor economic outlook is set to exacerbate worries about job security and will continue to weigh on consumer confidence.

By Mally Likukela

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