Interest rate outlook
There is much speculation regarding how central banks worldwide will further manage and deal with interest rates in an attempt to mitigate the impact of COVID-19.
Before we look at what the local interest rate expectations are going forward, let us first take a look at what has happened to interest rates recently.
Because Namibia is part of the common monetary area with South Africa, it is always relevant to also look at what has happened on their side. It will, of course, also be relevant to us for predicting Namibian interest rate movements going forward. South Africa's interest rate cycle cut started in 2019 when they reduced their repo lending rate by 0.25% in July last year. The Bank of Namibia did not follow at that stage. In 2020, South Africa, due to the economic impact of the COVID-19 pandemic, drastically cut rates by a further 3% to bring their repo rate to its current 3.5%. To a large degree, the Bank of Namibia has followed the same monetary relief by similarly cutting our central bank's repo rate by 2.75%, to where it currently stands at 3.75%.
For both the South African Reserve Bank (SARB) and the Bank of Namibia, there are two more meetings left for this calendar year. The question remains as to what the market can expect to happen at these meetings.
Let us look at South Africa first which has its next meeting in mid-September. Most analysts' expectation was that at least one, but perhaps even two, rate cuts of 0.25% each in South Africa were expected this year to try to support the struggling economy. However, the most recent inflation figure that came out of South Africa has significantly changed these expectations to one where some believe that the bottom turning point, at least for now, has been reached.
South African inflation for July came in at 3.2%. Although this is still low and very close to the bottom notch of their inflation target framework of between 3% and 6%, we must consider that it jumped from 2.2% in June to the 3.2% July figure, a 45% increase and also the most significant month-on-month increase in inflation since February 2016. We should further keep in mind that the SARB will focus intensely on expected future inflation. With the weaker Rand and significant price increases in administered services in SA such as water and municipal services, the expectation is certainly there for higher inflation going forward, despite the pressure on the consumer.
Looking at inflation, the chances of further reductions seem slim. Perhaps the SARB will first want to see what happens to inflation in the months ahead before announcing a further interest rate decrease in September. Even with the previous meeting in July this year, when inflation stood at 2.2%, there was disagreement amongst the members of the monetary policy committee (MPC) about whether in fact, they should lower their rates or not. The reduction was announced because only a slight majority were in favour of such a move.
In September, the majority of the MPC may most likely feel that a pause is the correct tactic for now. If they do cut rates in September, it will most likely be the last in this cycle. In any event, the general market sentiment is already that interest rates will remain low for a long time.
Turning to the Namibian context, the Bank of Namibia's next meeting will be on 21 October, and they will have the advantage of seeing what the South Africans are doing as well as where inflation is heading. At the previous meeting in August, the Governor of the Bank of Namibia, Johannes !Gawaxab indicated that the Bank would continue to support the struggling economy. Local growth remains negative despite better commodity prices. Private sector credit growth remains low, and inflation stayed at 2.1% for the last three months in a row. These are all factors that could lower rates further. However, it is still seven weeks away, and a lot can happen until then. The general expectation is also for one last cut. For now, be prepared that lower interest rates will be a part of our lives for some time.
Investors who want to know more about how and where to invest during this time, should contact Capricorn Private Wealth in Windhoek at 299 1157 or send an e-mail to wealth.privatewealth@capricorn.com.na.
