What to expect from interest rates going forward

It is always difficult to venture predictions about interest rates, especially if it is for longer than six months. Let's look at what we actually know and then I can try to indicate what our viewpoint is regarding interest rates in the coming months.

Interest rates are at an historic low.  South Africa cut their interest rates in 2020 alone with 3.25% to bring their repo rate to the current 3.5%. Here in Namibia, the Bank of Namibia also cut its repo rate with 1.5% thus far this year to bring our repo rate to a low of 3.75%. In October our reserve bank decided not to lower rates any further because they felt that the low rate offered enough support for the economy at that stage and also to underwrite the exchange rate peg with the South African Rand. Last week the SA Reserve Bank also decided to leave their repo rate unchanged despite many market analysts who had hoped for another decrease to give the economy an extra boost in the run-up to the Christmas period during which a large amount of spending can normally be expected.  If we remember that South Africa's inflation at present stands at 3.3%, which is very close to the bottom point of their inflation target band of between 3% and 6%, there was probably enough ammunition to provide the market with extra breathing space this time around. Especially considering that the expectation that inflation will move slightly lower towards the end of the year a bit of respite could have been provided. However, in the end the decision was to leave the rate unchanged for now.

Looking into the future, the expectation exists that there will be downward pressure on inflation with lower global production inflation rate and lower oil prices. Locally food inflation should also be lower and the recent stronger Rand should also suppress imported prices. On the other hand, the exchange rate can weaken very quickly and administrative prices, such as electricity, remain a danger for higher inflation. This means that the interest rate expectations are at present very much in the balance.  Interestingly enough, in the latest meeting of the SA Monetary Policy Committee meeting, two of the five members proposed a decrease but were only just overridden by the other three members who opted to leave the rates unchanged. At this stage the market does not expect any further decreases but rather two increases of 0.25% each towards the later stages of next year. Our view, given the current information at hand, is that rates may remain low for longer without another decrease in this cycle. This is on condition that there are no inflationary surprises and also that the economy does not see any further serious decline.

Thus my message to investors, especially to those who depend on interest bearing investments, is that they should be ​prepared for a continuing low interest rate environment for at least the next 6 months. At this stage the Capricorn Enhanced Cash Fund really offers very attractive rates relative to what is available elsewhere in the market with a current return of around 4.50% effective per annum after tax. There are also a number of alternative investment opportunities in the conservative space that we would like to discuss with investors and they are welcome to contact us at wealth.privatewealth@capricorn.com.na