News Column

Rate Hike Expected Next Week

February 14, 2014



THE central bank is expected to hike its repo rate next week, IJG Securities analyst Rowland Brown said yesterday.

He said the expected hike will be the start of a rate hiking cycle that will last for the next 18 months at least.

"As such, we expect to see a total move of 150 basis points by year end, thus increasing the repo rate from the current level of 5,5% to seven percent. We expect to see this 150 point increase broken down into three moves, including a February hike of 50 basis points, with further hikes coming in August and October, of 50 points each. Theoretically, these moves could be larger, but given the current levels of national indebtedness and financial stability risks of large hikes from a low interest rate base, we believe the Bank will be cautious of large or fast hikes," Brown wrote in an opinion piece yesterday.

He said the South African Reserve Bank's (SARB) unexpected interest rate hike in January has done the Monetary Policy Committee (MPC) of the Bank of Namibia (BON) a number of favours.

NEED FOR HIKES

Brown said all the economists already pointed to the fact that Namibia needed to start hiking rates, and fast.

The Bank of Namibia is not an inflation targeting central bank and the primary purpose of monetary policy in Namibia is to maintain the currency peg with the South African Rand as per the Common Monetary Area (CMA) agreement.

Brown said unlike in much of the rest of the world, where monetary policy tightening is occurring already, the Namibian economy is growing, and growing fast.

With growth of over five percent expected in 2014, the economy will actually be overheating, which can be expected to drive up demand side inflation.

INFLATION

On the inflation front, Brown says while the current inflation picture for Namibia is positive, the outlook is less so.

On currency reserve levels, he says the bank has to carefully manage reserve levels, which will be no easy feat in 2014 after these levels declined substantially through 2013, falling to well below the benchmark level of three months of import cover on a number of occasions through the latter part of the year.

"Interest rate moves must be taken pre-emptively, and thus, with the horse eying up the stable door, the time to move is now. Much of the world is starting a process of monetary policy consolidation, and most of the world is doing so while in an altogether far weaker growth, and far stronger balance of payments positions than those of Namibia," he said.

HOUSEHOLD LEVELS

Brown said the concern for Namibia is household debt levels, but he said it is better to send a message to the market that rates are going to start increasing now, than allow indebtedness to increase further before doing so.

"The time for soft guidance is now over, and a rate increase is required. Should the Bank not move now, a risk exists of being forced to make large rate hikes over a short period of time in the future, which may cause some financial duress for the Namibian people, considering the high level of national household indebtedness, which may in turn result in risks to financial stability," he said.


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Source: AllAfrica


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