This week, the Bank of Namibia’s (BoN) Monetary Policy Committee (MPC) will announce changes to the repo rate with wide expectations that the rate will continue scaling up.
Research experts, Simonis Storm have predicted that in the next eight weeks, the central bank will hike the rate twice with 25bps on both occasions.
The first hike is expected this week on the 19th of April while the next one will expectedly come on June 14.
“We do expect Bank of Namibia (BoN) to hike the repo rate by 25bps each in their 19 April and 14 June 2023 meetings. This implies a repo rate of 7.5% by mid-2023,” the experts said last week.
Affirming this stance, the firm also noted local interest rate hikes will continue to be implemented until inflation shows signs of moving closer to 6%.
“With the latest inflation print not moving closer to 6%, we anticipate the central bank to hike the repo rate by 25 basis points on 19 April. During the last Monetary Policy Committee (MPC) dialogue, the Bank of Namibia (BoN) Governor acknowledged that not all members agreed on a rate hike, but their views were outnumbered. Therefore, we expect that the bank will not take an overly aggressive approach,” further stated the firm last week.
A fortnight ago, the South African Reserve Bank (SARB) pulled both triggers on its monetary policy shotgun, raising its key repo rate by 50 basis points, confounding expectations of a rise of 25 basis points. The increase brought the repo rate to 7.75% and prime lending rate to 11.25 percent. Business Express understands that the sharp increase came in the wake of high inflation.
Inflationary pressure
Annual inflation rose by 7.2% y/y in March 2023, the same as the prior month. Risks to the upside have increased – such as food, fuel and electricity tariffs, as well as a weaker Rand exchange rate – and key drivers of inflation such as food and transport are likely to be stickier.
“As a result, we have revised our inflation forecast from 5.3% to 5.9% for 2023,” Simonis Storm extended.
The firm also went on to mention other inflation risk factors. It noted that Nampower has requested a 16% increase in electricity tariffs, and this is subject to the discretionary approval of the Electricity Control Board (ECB) in April 2023.
“It is notable that local demand for electricity is increasing with a seasonal effect in winter and spring seasons, where 2023 electricity demand increased notably due to the recovery of business and mining activity,” said the firm adding that “depending on what the ECB approves, we do see higher electricity tariffs – which would be effective July 2023 – as a risk to inflation in 2H2023. This is due to the fact that the housing and utilities category has the largest weight in the consumer price basket (28.36%).”
Furthermore, the firm said that based on statistical models used by the International Research Institute for Climate and Society (IRICS), there is a 40% probability that Namibia will receive below-average rainfall, which could pose a risk to the production of electricity from the Ruacana power station.
Additionally, vegetation conditions in Namibia are below normal, which will negatively impact livestock maintenance and maize meal (e.g. pearl millet) production, according to the Agromet Update of February 2023.
Moreover, due to floods in South Africa and high levels of load shedding constraining farmers’ abilities to use farm irrigation systems and pumping water from boreholes, crop production is expected to be negative in 2023.
“Combined with a weakening Rand/US dollar exchange rate, food prices are expected to increase. The Rand has weakened by 7.2% YTD against the US dollar and we forecast an average 17.80 Rand/US dollar exchange rate for 2023. This is due to the fact that majority of our food is imported from South Africa. Despite South Africa’s imported inflation, domestic economic conditions apply further inflationary pressures as mentioned earlier. Therefore, we forecast that food prices will remain the main driver of inflation in Namibia for 2023.
“In our latest Quarterly Economic Review report, we highlighted that global oil prices are forecasted to reach USD 90 per barrel by the end of the year. Together with a weakening Rand, we do expect additional local fuel price hikes to be announced in coming months,” further affirmed the firm.