By: Josef Kefas Sheehama
At its second Monetary Policy Committee meeting of 2022, on the 13 April 2022D, the Bank of Namibia is expected to hike its Repo Rate to 4.25% for the second consecutive time.
All of Namibian’sNamibian’s banks now expect the Bank of Namibia to hike its Repo Rate target by 0.25 basis points on the 13 April 2022, which would bring its key lending rate to 4.25%. The decision reflects the central bank’s ongoing view that the current repo rate is appropriate to support the still weak domestic economy due to the Covid-19 pandemic and protect the Namibian dollar’s one-to-one peg to the South African rand. Meanwhile, inflationary pressures will further encourage the Bank of Namibia to tighten its monetary policy. The increase in fuel prices has been noted as a concern for the global and local economies.
These increases will undoubtedly impact every Namibian, given the country’s reliance on fuels for transportation, manufacturing, and the agricultural sector.
The sanctions on Russia by the USA and UK have contributed to the increase in crude oil prices. Sources from the group told Reuters the output deal is showing no cracks so far after Russia invaded Ukraine, and the group is likely to stick to a planned output rise despite crude topping $100 a barrel. In addition, the invasion of Ukraine has triggered significant increases in commodity prices, including wheat and cooking oil. This will add to inflationary pressure in Namibia in the coming months.
As an independent economist and business analyst, I firmly believe that the Monetary Policy Committee of the Bank of Namibia will increase the repurchase rate by 25 basis points to 4.25% from 4.00% on 13 April 2022. Many economists anticipated that MPC would hike the interest rate by 125% bps by end-2022. Driving up such inflation was the rise in electricity, gas, fuel, food, and transport prices.
To policymakers, inflation hampers economic growth and development, discouraging investment and savings. Therefore, rising crude oil prices amidst escalating fears created by the conflict in Ukraine is one of the main reasons for the increase in Namibia’s fuel prices.
The fundamental debates about inflation are whether the central bank is an inflation creator or an inflation fighter. The responsibility of monetary policymakers is to respond to inflation adequately. 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 central bank’s job is to adjust its policy in response to these shocks. Furthermore, inadequate supply of locally produced and imported commodities, the high price of imported items, and the high price of imported goods arising from increases in foreign prices are instability of foreign exchange, thereby affecting our economy and its growth.
However, higher interest rates and inflation rates would push up consumer financial vulnerability.
The surging cost of living raises expectations that the Bank of Namibia will look to hike interest rates again. The MPC will face 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’sIt’s not just the cost of living that is increasing, so is the price of going to work, and salaries increases may not be enough to cover the cost of returning to normality. The upside surprises to the headline and core inflation readings would further the Bank of Namibia’sNamibia’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 will still feel the pinch as price increases may worsen before they get better, particularly with the energy price cap set to increase.
Furthermore, we expect the invasion to have adverse implications for Namibia’sNamibia’s headline CPI because higher oil and grain prices directly push up prices of key goods within the CPI, such as fuel and bread.
However, it is tough to say what this will mean for headline inflation in the coming years. There is exceptionally elevated uncertainty about 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 how 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 precisely 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 2023, lower oil prices and base effects would see headline CPI declined further to 3.7%. This trajectory is considerably higher than the previous forecast. Still, it emphasizes that the breach of the target is likely to be brief and limited, and inflation is expected to trend down to 2023, assuming oil prices behave in line with my assumption.
In conclusion, Namibia’sNamibia’s economic rebound is expected to continue, albeit slower, as policy stimulus fades and terms of trade retreat from the recent record highs. Inflation is expected to moderate, supporting a gradual rate hiking cycle. Namibia hopes for three further 25 basis point increase for the year. Persistent, idiosyncratic risks remain, particularly electricity disruptions and high levels of unemployment. If structural reforms were accelerated, it could boost confidence and investment and drive faster growth. Regarding inflation, the invasion of Ukraine by Russia has led to further significant increases in energy and other commodity prices, including food prices.
It is also likely to exacerbate global supply chain disruptions and significantly increase the uncertainty around the economic outlook.