by Josef Kefas Sheehama
At its second Monetary Policy Committee meeting of 2022, on the 13 April 2022D, the Bank of Namibia is expected to hike its Repo Rate to 4.25% for the second consecutive time.
All of Namibian’s banks now expect the Bank of Namibia to hike its Repo Rate target by 0.25 basis points on the 13 April 2022, which would bring its key lending rate to 4.25%. The decision reflects the central bank’s ongoing view that the current repo rate is appropriate to support the still weak domestic economy due to the Covid-19 pandemic and to protect the Namibian dollar’s one-to-one peg to the South African rand. Meanwhile, inflationary pressures will further encourage the Bank of Namibia to tighten its monetary policy. The increase in fuel prices has been noted as a concern for the global and local economies.
These increases will certainly impact every single Namibian given the reliance the country has on fuels for transportation, manufacturing, and the agricultural sector. The sanctions on Russia by the USA and UK have contributed to the increase in crude oil prices. Sources from the group told Reuters the output deal is showing no cracks so far after Russia’s invasion of Ukraine, and the group is likely to stick to a planned output rise despite crude topping $100 a barrel. In addition, the invasion of Ukraine has triggered large increases in commodity prices, including wheat and cooking oil. This will add to inflationary pressure in Namibia in the coming months.
In my view as independent economics and business analyst, I strongly believe that the Monetary Policy Committee of the Bank of Namibia will increase the repurchase rate by 25 basis points to 4.25% from 4.00% on the 13 April 2022. Many economists anticipated that MPC will hikes the interest rate by 125% bps by end-2022. Driving up such inflation was the rise in the prices for items such as electricity, gas, fuel, food, and transport. To policymakers, inflation hampers economic growth and development as it discourages investment and savings. Therefore, rising crude oil prices amidst escalating fears created by the conflict in Ukraine is one of the main reasons for the increase in Namibia’s fuel prices.
The fundamental debates about inflation are really concerned with whether the central bank is an inflation creator or an inflation fighter. The responsibility of monetary policymakers is to adequately respond to inflation. Those who see the central bank as an inflation fighter must therefore believe that inflation has some source other than the central bank, that it has nonmonetary factors. The job of the central bank is to adjust its policy in response to these shocks. Furthermore, inadequate supply of locally produced and imported commodities, the high price of imported commodities, and the high price of imported goods arising from increases in foreign prices are instability of foreign exchange, thereby affecting our economy and its growth. However, higher interest rates and inflation rates would push up consumer financial vulnerability.
The surging cost of living is raising expectations that the Bank of Namibia will look to hike interest rates again. The MPC will be faced with a difficult trade-off between ensuring financial stability and helping households cope with a cost of living crisis that is set to squeeze household finances over a difficult period. It’s not just the cost of living that is increasing, so is the cost of going to work, and salaries increases may not be enough to cover the cost of returning to normality. The upside surprises to both the headline and core inflation readings would further the Bank of Namibia’s discomfort with its current policy stance. There is no doubt that prices are being boosted by factors that should moderate in time, including surging energy costs and supply chain problems. But in the near term, consumers are still going to feel the pinch as price increases may get worse before they get better, particularly with the energy price cap set to increase.
Furthermore, we expect the invasion to have adverse implications for Namibia’s headline CPI because higher oil and grain prices directly push up prices of key goods within the CPI, such as fuel and bread. However, it noted that it is exceptionally hard to say what this will mean for headline inflation in the coming years because there is exceptionally elevated uncertainty about exactly where key commodity prices such as oil and grains will settle. There is also massive uncertainty about the impact of various supply chain disruptions and the degree to which firms can pass on their higher input costs to consumers in the face of a significant negative demand and confidence shock. The biggest uncertainty for the trajectory of headline CPI, in my view, is exactly where oil prices will go, given that for years to come, the market for crude is now likely to be precariously balanced, deeply disjointed, and volatile.
Despite stronger food price inflation and core inflation into early 2023, lower oil prices and base effects would see headline CPI declined further to 3.7%. This is a trajectory that is considerably higher than the previous forecast but emphasizes that the breach of a target is likely to be brief and limited, and inflation is likely to still trend down out to 2023 assuming oil prices behave in line with my assumption.
In conclusion, Namibia’s economic rebound is expected to continue, albeit at a slower rate, as policy stimulus fades and terms of trade retreat from the recent record highs. Inflation is expected to moderate, supporting a gradual rate hiking cycle. Namibia expects three further 25 basis point increases over the course of the year. Persistent idiosyncratic risks remain, particularly electricity disruptions and high levels of unemployment. If structural reforms were accelerated, it could boost confidence, and investment and drive faster growth. Regarding inflation, the invasion of Ukraine by Russia has led to further large increases in energy and other commodity prices including food prices. It is also likely to exacerbate global supply chain disruptions and has increased the uncertainty around the economic outlook significantly.
