Namibia increases repo rate, warns on inflation

BoN governor Tom Alweendo warned that inflation, which currently stands at 5.4 percent could increase to above 6 percent in the first quarter of 2007.

Alweendo said that the inflation outlook remained under threat adding that the problem was beyond Namibia’s control.

“The expectations on inflation are quite high. The inflation outlook itself does not look well,” Alweendo said.

Namibia’s inflation has been rising since the beginning of the year topping 5.4 percent in August from 5.1 percent in July.

South Africa and Namibia’s economies are heavily aligned with the Namibian dollar pegged on a 1 to 1 with the South Africa rand.

Trade between the two countries is heavily dominated by the region’s economic powerhouse, South Africa, while monetary policies are set in Pretoria.

The rate increase by the BoN, which subsequently followed that of the South Africa Reserve Bank ‘s monetary policy announcement, means that commercial banks would automatically adjust prime lending rates from 12.75 percent to 13.25 percent.

Namibia’s broad money supply (M2) has also continued to rise since the beginning of the third quarter. On a year-by-year basis M2 grew by 19.3 percent in July and 18.4 percent in August, Alweendo said.

Money supply averaged a 15.6 percent growth during the first 8 months of 2006.

“The robust domestic demand, M2 growth, high fuel prices and the depreciating domestic currency continued to pose an upside risk to domestic inflation outlook,” Alweendo said.

Alweendo admitted that the inflationary pressure Namibia is currently experiencing is imported from South Africa.

“Given the significance of the imported inflation from South Africa to Namibia, the soaring of the South African Producer Price Index (PPI) is a matter of concern,” Alweendo said.

South Africa’s PPI grew at a faster pace of 9.2 percent during August against a 8.1 percent rise in July this year. “The increase during August 2006 is quite significant when compared to a slower growth of 4.2 percent recorded during the corresponding month of 2005.

“The perpetual rise in the PPI will further create inflationary pressures for Namibia,” Alweendo said.

The rate hike, in line with expectations, is the third rise of 50 basis points since June this year and analysts expect further rate increases in the coming year as monetary authorities fight to down rising inflation.

“The monetary policy committee remains concerned about the outlook for inflation going forward and is of the view that the risks to inflation outlook are still on the upside,” said SARB governor Tito Mboweni.

The South African rand has lost about 17 percent of its value so far this year against the US$ knocked by emerging market jitters, falling commodity prices and current account deficits.

While the depreciation of the rand/N$ has been a boon for exporters, economists say a continued decline could worsen inflation.

“Its difficult to say at what point the exchange rate is desirable but what we are trying to avoid is a volatile exchange rate. It is not easy to say at what level is the rate desirable,” Alweendo said.

The rand, which had gained some weight before the announcement of the monetary policy on Thursday weakened by about 7 cents against the dollar following the rate hike.

The rand was trading at 7.71 to the dollar Thursday afternoon, 0.8 percent weaker than just before the rate decision was taken.

October 2006
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