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BoN to cut interest rates - analysts

Fri, 28 July 2017 17:41

With an improving inflation outlook and the economy at its bottom, analysts are optimistic that the Monetary Policy Committee (MPC) will likely cut the repo rate taking after the South African Reserve Bank (SARB) which cut the repo rate from 7% to 6.75% last week.

Since 2010, the Bank of Namibia’s (BoN) policy rates have always been tracking after that of the SARB whose most recent surprising move to cut the repo rate might prompt the same action in Namibia, analysts have said.

“While the Namibian MPC is independent, SARB actions do have a bearing on Namibian policy rates, in that SA and Nam policy rates have largely tracked each other since 2010. Considering that the Namibian economy has been bouncing along the bottom, we can assume there is a strong case to cut interest rates to accelerate growth,” says FNB’s Namene Kalili, Research manager of Strategic Marketing and Communications.   He, however, observes that the major difference has been that SA “was historically more aggressive in hiking and unwinding policy rates and hence we tend to find higher rate peaks and lower rate troughs in SA versus Namibia.”

With the economy currently in a recession, Dylan van Wyk affirms that the BoN might take advantage of this to arouse economic growth via its monetary policy.

 “We believe BoN will likely follow the South African reserve bank’s rate cut decision. Seeing as Namibia is currently in the recession, BoN might want to make use of this opportunity to stimulate the economy using monetary policy,” says the Research analyst. The repo rate is the rate at which central banks lend money to commercial banks in the event of any shortfall of funds and is used by monetary authorities to control inflation. The rate has a bearing on the amount of interest commercial banks charge on the loans they extend to their borrowers.

“Very simplistically, lower interest rates will encourage borrowing which should incentivise businesses to expand. This increases aggregate demand (the overall demand for all goods and services in an economy), which boosts growth as measured by gross domestic product (GDP),” says Van Wyk. However, Namene advises that it would be prudent to keep the rate at 7 percent considering that inflation is on a downward trajectory while a noted improvement in imports has worked well to stabilise the country’s international reserves.

“But at the same time, imports have moderated sufficiently to stabilise our reserve position, while inflation is trending towards the target band. All these factors can encourage an upswing without necessarily cutting interest rates. For this reason, it may be wise to consider keeping interest rates on hold, for now, to encourage savings which translate into investments at a later stage. It is these investments that can increase productive capacity and lead to sustainable economic, export and employment growth,” he says.

 The sudden cut in the repo rate did not stimulate a sudden improvement in the Rand performance however which wavered near the R13/US$ mark, but Van Wyk holds that “the turning of the rate cycle does not mean that the rand will continue to weaken, as there are many other factors that influence the exchange rate.” Meanwhile, the MPC kept the repo rate unchanged at 7 percent as at the 14th of June 2017 affirming that, “It remains appropriate to maintain the one-to-one link between the Namibian dollar and the South African Rand without compromising growth.”