Will interest rates hike any time soon?
This is a very relevant question, especially in Namibia, with many investors investing in interest-bearing instruments. To make matters worse, most of these investors are also dependent on the interest earnings on such investments. All of us are well aware of the reduction in interest rates since the outbreak of COVID-19. In our country and South Africa alike, the central banks have cut interest rates by 3% last year to support the economy and consumers amidst the challenges posed by the pandemic. Before that, ordinary money market investments earned around 7% per annum, and now investors are struggling to earn 4%.
So, for many Namibian investors, the question of "Where interest rates are heading" is a significant one. With rates so low, inflation eats away at investors' real value or purchasing power year after year, which means that such investors become poorer by the year. Such investors are in desperate need to know when they can expect some relief in the form of higher interest rates. To reflect on where deposit rates are heading for Namibian investors, we need to focus on what the interest rate expectation in South Africa is. Namibia is part of the Common Monetary Area with the likes of South Africa, and as a result, our interest rate movement very much corresponds with that of South Africa.
In South Africa, futures contracts imply there will be two possible rate increases in this year of 0.25% each. On the other hand, according to Bloomberg, most analysts feel the first increase will only be in the first quarter of 2022. The reasonably significant jump in SA inflation for May does provide ammunition for a rate hike - inflation jumped to 5.2% for May from the 4.4% in April and is now significantly above the midpoint of their inflation target of 3% to 6%. Then again, this inflation figure is expected to decline in the months ahead. Furthermore, economic growth in South Africa remains severely under pressure, and credit growth remains negative, now for the 3rd month in a row. With negative credit growth, a struggling economy, controlled inflation and low unemployment, I cannot see how rates will rise quickly in our neighbouring country. In America, too, it does not look like the Federal Reserve Bank will raise interest rates anytime soon. At this stage, the expectation for the first increase in the US is only in 2023.
On the Namibian side, inflation also appears to be under control at 3.8% for May, slightly lower than 3.9% from April. Our economy is still shrinking - the first quarter was 6.5% lower compared to the first quarter of 2020 and 9.3% lower compared to the last quarter of 2020. Even with such a low base, it seems like we might not even see 2 % growth for 2021.
Conditions of low economic growth and lower inflation expectations coupled with negative credit growth usually pave the way for an interest rate cut. However, it does not seem to be on the table for now – so it seems like the theme of “low-interest rates for longer" will persist for the time being. Investors should not hope for or budget for rate hikes any time soon. My advice would rather be to take advantage of higher longer-term rates, which offer good value at present with the market seeing an increase but, in my opinion, the chances are slim that interest rates will rise within the next 12 months.
Take a look at the Capricorn Enhanced Cash Fund, which currently distributes around 4.4% per annum after tax, and funds are available on request.