Research experts, Simonis Storm have said that they maintain their view that no further rate hikes in Namibia will take place for the remainder of 2023.
The local Monetary Policy Committee (MPC) had their third meeting for 2023 and hiked the repo rate by 50bps, taking the repo rate from 7.25% to 7.75% and the prime rate from 11.0% to 11.5%. this also implies that the average home loan rate increases to 12.5% and the average car loan rate increases to 13.5%.
“Going forward, we expect the Fed to keep rates unchanged on 14 June 2023. This could in all likelihood lead the SARB to keep rates unchanged in their July 2023 meeting. With that said, we then maintain our view that no further rate hikes in Namibia will take place for the remainder of 2023,” Simonis Storm said.
THIRD FASTEST CYCLE
The firm noted that they see that the current hiking cycle is the third fastest cycle in terms of how fast interest rates rose for a set number of months. The longest hiking cycle lasted 28 months (1994 to 1997) and the shortest hiking cycle was in 1998, where Bank of Namibia hiked the repo rate by 275bps in one meeting alone which took the repo rate from 18.00% to 20.75% in that year.
“Also, the current rate hiking cycle is less aggressive than the hiking cycle of 1998 in terms of the basis point magnitude of total cumulative rate hikes. In 1998, the repo rate was hiked by a cumulative 525bps (from 16% to 21.25%), whereas the repo rate was hiked by a cumulative 400bps between December 2021 and June 2023. Interestingly, the hiking cycle of 2002 and 2006 were both 350bps in cumulative rate hikes. Of course, the current rate hiking cycle is not over yet and if our expectations are correct, the current hiking cycle will be the second most aggressive in terms of rate hike magnitudes,” explained Simonis Storm.
RESTRICTIVE MONETARY POLICY
While financial conditions are not excessively restrictive compared to past hiking cycles, Simonis Storm highlighted that monetary policy is restrictive at the moment and runs the risk of weighing on economic activity in Namibia.
“The real repo rate in Namibia is currently 1.45% and is less restrictive compared to real central bank policy rates in other emerging markets. The real repo rate in Namibia has been positive since April 2023, indicating that monetary policy has been restrictive for the last two and a half months. Due to the lag effect of monetary policy, the cumulative 300bps hikes from December 2021 to December 2022 have not had an impact on the real economy as yet. In addition, further rate hikes during 2023 would add to the negative impacts of the 300bps hikes from 2022 and would weigh on economic activity in 2024,” explained the firm.
DEVIATION
With the latest MPC meeting announcement, BoN continues its deviation from SARB’s repo rate which started in August 2022. Members of the Southern African Common Monetary Area (which consists of South Africa, Lesotho, Eswatini and Namibia) have all deviated from SARB’s interest rate path and there have been fairly large divergences.
“One would normally expect these rates to be closely in line with SARB’s repo rate. By mid-June 2023, both Namibia and Eswatini’s policy rate is 50bps below South Africa’s, while Lesotho’s policy rate is 75bps lower. It is difficult to predict the future path of monetary policy, but it seems deviations from SARB could likely continue.
“One argument might be that central bank policy rates are kept constant until SARB starts cutting rates. In this way, SARB’s repo rate converges to central bank policy rates in Namibia, Eswatini and Lesotho. The other argument is that South Africa continues to hike and so the hand of these countries will be forced to move in line with SARB and eventually have their central bank policy rates converge to SARB’s repo rate.
“With monetary policy already being restrictive, even tighter financial conditions will weigh on economic growth in the region and taken together with a weaker external business environment, risks to SACU revenue could abound in the medium-term as rates continue to rise,” further explained the firm.