By Josef Kefas Sheehama
The conventional view among economists is that higher interest rates lead to lower inflation. However, recent events in Namibia challenge this view. The Bank of Namibia has increased its repo rate since 2022 to curb inflation, but it has not been effective. In fact, the endless series of interest rate rises has sparked arguments about whether monetary policy is the fairest and most effective way to curb inflation. The Bank of Namibia recently raised its benchmark repo rate by 0.25 bps to 7.25% at its April 2023 meeting, bringing the prime lending rate to 11% and the mortgage lending rate to 12%. However, the inflation rate in Namibia is currently at 7.20%, and raising interest rates knocked the economy into a recession and spiked the unemployment rate, which drove down prices. The cost-of-living crisis will deepen inequality in Namibia, and yet no political party is talking seriously about addressing the enormity of this challenge by fixing the broken social safety net.
Raising interest rates will not solve the inflation problem. Short of throwing thousands of people out of work in a depression, higher rates wouldn’t bring supply and demand back into balance, which is a necessary condition for price stability. By raising interest rates, the Bank of Namibia hopes to slow the economy by making it more expensive for consumers and businesses to borrow money. However, using interest rate hikes as a tool to solve the inflation problem could trigger a recession. A rise in interest rates makes it more expensive for companies to expand. That, in turn, could lead to cuts in investments, ultimately hurting employment and jobs. Moreover, credit growth is already weak, so raising rates would have little impact on the economy.
The good news is that a new way of thinking about macroeconomics is emerging, and we need to apply new methodologies. Many new economic thinkers are now engaged in understanding the complex realities of the world we live in. The Bank of Namibia can only impact the interest rate and is unable to do anything about supply chain issues that cause inflation to rise. It is hard to imagine a time when the challenges we faced so vastly exceeded the creative resources we have brought to bear on them. We need to develop new ways of thinking to enterprise better solutions and experiences that solve our current problems.
In conclusion, the valid arguments for and against increasing interest rates to control inflation show that this issue requires a thoughtful approach. While theory should be an important driver of practice, we need to encourage critical reflection on the theory itself and the ways that it is being extended and how it is informing practice. We can’t solve problems by using the same kind of thinking we used when we created them. Therefore, we need new ideas that tackle the imported inflation challenges headache instead of increasing interest rates. We have been doing this for many centuries, and it has been proven that increasing interest rates is not a solution to curb inflation catastrophe. We need new strategies that result in differences that matter and a sense of purpose that engages everyone affected by this economic psychology.
– Namibia Daily News
