It is expected that when interest rates are low, individuals and businesses will approach commercial banks to seek for credit in order to invest in business activities and eventually boost economic growth.
However, the prevailing uncertainties caused by the Covid-19 pandemic are making the low interest rate environment less effective in stimulating growth due to low consumer and business confidence.
On a positive note, low interest rates provide relief to indebted households and businesses due to cheap servicing costs.
The Bank of Namibia (BoN) decided to leave the repo rate unchanged at its historic low of 3.75%. That means the prime lending rates for local commercial bank will also remain at 7.50%.
Speaking at the monetary announcement yesterday, Johannes !Gawaxab, Governor of the central bank pointed out that Namibia's real gross domestic product (GDP) improved in the second quarter of 2021, while economic activity remained subdued year-to-date. The rate of inflation continued to increase, while growth in Private Sector Credit Extension (PSCE) declined. The stock of international reserves remained sufficient to support the currency peg and meet the country's international financial obligations.
Growth in private sector credit extension (PSCE) moderated to an average of 2.5% for the first eight months of 2021, lower than the average of 4.1% recorded during the same period in 2020. The slowdown in PSCE was due to lower demand for credit by both businesses and households, as a result of slow domestic economic activity during the review period, he added.
According to Simonis Storm (SS), absence of excessive borrowing placing upward pressure on asset price inflation and consumption spending in Namibia, the low interest rate environment does not pose any risk to financial sector stability or inflation.
Given the expectation of persistent weak credit demand, current low interest rates remain favourable, with no need to hike from a PSCE perspective. “We do not expect an interest rate hike by Bank of Namibia before the end of this year, SS said.
!Gawaxab notes that the 1.6% growth during the second quarter of 2021 was attributed to better growth in sectors such as hotels and restaurants, wholesale and retail trade, fishing, administrative and support services as well as information and communication during the second quarter of 2021.
Economic indicators showed that the domestic economy slowed year-to-date relative to the corresponding period of 2020. The slowdown in economic activity was observed in major sectors such as mining, agriculture, manufacturing, construction, tourism as well as transport and storage.
On the contrary, activities in the wholesale and retail trade sector as well as the telecommunication subsector increased during the review period. Going forward, the domestic economy is expected to grow by 1.4% in 2021 and 3.4% in 2022. Risks to the domestic economic outlook in the near-term remain and include sudden surges in Covid-19 cases with concomitant disruptions to economic activity caused by potential Covid-19 restrictions, he warned.
Annual average inflation increased to 3.5% during the first nine months of 2021, compared to 2.2% for the corresponding period in the previous year.
The increase in inflation was mainly driven by base-effects, food and transport categories. This was on account of supply constraints for certain food categories and a rise in international oil prices respectively.
On a monthly basis, overall inflation increased slightly to 3.5% in September 2021 from 3.4 percent in August. Namibia's overall inflation is projected to average around 3.7 percent for 2021, slightly lower than the previous forecast of 3.9%, !Gawaxab said.
As at 30th of September 2021, the stock of international reserves stood at N$45.9 billion compared to N$42.7 billion in July 2021.
The increase in reserves was mainly attributed to the international Monetary Fund (IMF) Special Drawing Rights (SDR) allocation and relative depreciation of the exchange rate. The international reserves, at the above level, were estimated to cover 6.7 months of imports.
At this level, Namibia's international reserves remain adequate to protect the peg of the Namibia dollar to the South African Rand, while meeting the country's international financial obligations, the governor said. [email protected]