BoN cuts repo rate
19 February 2020 | Banking
Domestic and financial developments informing the decision to lower the repo rate were because inflation continues to trend downwards, mainly owing to a slowdown in rent inflation and the bank expects that inflation will remain below 5% for 2020. Also, international reserves remain healthy at 4.4 months’ worth of import cover. Furthermore, growth in domestic credit extension remains moderate, mainly on account of borrowing by businesses in the real estate and financial sectors
Theoretically, interest rate cuts stimulate the economy through lower borrowing costs which induce borrowing and investment. While the recent rate cut brings moderate relief to indebted households and corporates, FirstRand Namibia does not believe it will be sufficient to drive meaningful economic growth in the current environment characterised by low confidence.
This view is corroborated by real sector data releases following the repo rate cut in August 2019, which did not show signs of significant improvement.
It is our opinion that the onus to stimulate meaningful economic growth does not lie in the repo rate adjustment alone, given the structural nature of the low growth environment. Rather, complementary policies that support growth and employment creation should be put in place for demand growth to systematically respond to monetary policy action.
This sentiment was echoed by the central bank Governor, who emphasised that interest rates are already at historically low levels.
The accommodative stance taken by the central bank comes at a time where regional peers including South Africa, Lesotho, Zimbabwe and Kenya have been cutting rates against a background of sluggish growth. The low inflation, flat credit uptake and the low growth environment support the case for further rate cuts. However, we believe interest rate decisions will likely be guided by those of South Africa’s, in order to prevent capital outflows needed to maintain the currency peg.
The next MPC meeting is scheduled for 15 April 2020.
Ruusa Nandago is an economist at FirstRand Namibia.