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THE RACE TO TAME INFLATION INFLICT MORE PAIN

By: Nghiinomenwa Erastus

In a quest to calm down the trajectory in the prices of goods and services, the bank of Namibia is making the cost of money more expensive and burdening those with debt obligations.

Households and corporates’ debt currently accounts for about 80% of 2021’s real GDP.

For those planning to borrow to fund their consumption or investment, be ready to be charged a minimum of 8.50% interest (extra 0.50%) depending on your risk profile.

While those paying your debt obligation make arrangements for extra servicing costs.

This is in line with the repo rate increase of 50 basis points as announced by the central bank yesterday.

Moreover, analysts have projected more increase on the benchmark rate (repo rate) of around 100 basis points (1%) by the end of the year.

The level of inflation in South Africa is close to the upper limit of the South African Reserve Bank target range of between 3% and 6%, which has contributed further to the monetary tightening by SA.

As a result, the South African reserve bank in its quest to tame inflation to within targeted level increased the cost of money (repo rate) in their economy last month by 50 basis points (0,5%) to 4,75%.

The Namibian Central Bank Monetary Policy Committee also met this week, and decided to follow suit by increasing the benchmark rate by 0,5% (50basis points) yesterday.

Reason being that the increase is inline with persistent inflationary pressure (domestic and in SA) and to maintain the Dollar-Rand peg obligation.

As a result the mother of all interest rate which influences all other interest charged on loans and other commitments was raised to 4,75%- inducing increases on the prime lending rate and mortgage.

At the same time jerking up installment costs for all those with monthly interest obligations to service.

The race to tame inflation is heating up among central banks, given that all monetary controlling institutions have inflation targeting frameworks that indicate the preferred inflation level.

Until inflation levels in South Africa cool down and are not so close to the upper range of 6%, the SA Reserve Bank will keep unleashing the repo rate tool to satbilize prices- making money expensive for those borrowing to consume.

Currently, the South African inflation rate is approaching 6%.

Due to the peg arrangement and to ensure no capital outflow, the Namibia Central Bank follows suit regardless of internal dynamics (in many observed cases as they prevail now).

The Villager Business Desk asked senior Economist, Salomo Hei if perhaps central banks can shift the upper range of inflation targeting to allow for a bit high inflation, so the central banks tone down on increasing the cost of money.

Hei explained that high inflation is not conducive for any economy, a balance needs to be created, as a result it needs to be stabilized.

He said the current inflation target range is acceptable as it provides a sufficient threshold for stable inflation.

In terms of how the consumers can be cushioned from raising cost of money and repayment burden, Hei explained that for a small open economy like Namibia with a small productive capacity it is extremely difficult to ignore the peg.

Adding that the stability of inflation is critical and that’s currently the objective of the MPC.

The cushioning measures will have to come through business and household choices, stated Hei

According to Simonis Storm’s Economist Theo Klein, the private sector (households and corporates) debt currently accounts for about 80% of 2021’s real GDP which is relatively high compared to other Southern African and emerging market economies.

This indicates that many households and companies have debts that they are servicing and if the interest (installment) on their debts change with the repo rate; they are in for a ride.

He added that excessive risk taking which overheats the economy would be an inflationary concern and warrant interest rate hikes from a monetary policy perspective.

However, this is not the case for Namibia, and while interest rates are hiked more for Rand weakness concerns explained Klein.

As a weaker Rand is an inflationary risk in itself.

“We believe that rising interest rates will weigh on credit demand and economic growth in Namibia going forward,” he projected .

According to Klein they foresee 200bps rate hikes cumulatively by the end of the year more likely given recent developments. Email: erastus@the villager.com.na

Julia Heita

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