THE Monetary Policy Committee (MPC) of the Bank of Namibia (BON) for the first time after several years has cut interest rates, bringing the Repo rate down by 25 basis points to 6.50% to provide relief and stimulus to the Namibian economy which is currently under a liquidity squeeze.
This announcement concurs with analyst forecasts that opined that governments around the world would loosen their purse strings, borrow more, cut taxes or spend more. The South African Reserve Bank (SARB) last month unanimously decided to reduce the repurchase rate by 25 basis points to 6.5% per annum.
The Governor of BON, Iipumbu Shiimi said that MPC took the decision to cut the repo rate in order to support domestic economic activity and to maintain the one-to-one link between the Namibia Dollar and the South African Rand.
Shiimi further stated that several central banks in the Advanced Economies (AEs), Emerging Market, and Developing Economies (EMDEs) cut their policy rates, since the previous MPC meeting in June 2019.
These include the US, Brazil, Russia, India and South African while some others, such as the European Central Bank, left their policy rates unchanged.
Touching on the local economy, Shiimi stated that Domestic economic activity continued to slow during the first six months of 2019, compared to the corresponding period of 2018.
“The slowdown was reflected in sectors such as mining, construction, electricity and wholesale and retail trade. Other sectors, such as manufacturing, transport and communication, improved during the same period. Going forward, the domestic economy is projected to remain weak in 2019.”
The average inflation rate declined to 4.4% during the first six months of 2019 from its highest level of 5.6% observed in November 2018.
The moderation was mainly due to a decline in housing inflation. On a monthly basis, inflation declined to 3.9% in June 2019, from 4.1%reported in May 2019. Overall inflation is projected to average 4.3% in 2019.
Annual average growth in Private Sector Credit Extension (PSCE) increased to 6.95% during the first six months of 2019, compared to 5.95% in the corresponding period of 2018. The increase in PSCE was mainly due to higher uptake of credit by businesses in the retail, real estate, financial and mining sectors.
Shiimi concluded that as at 31 July 2019, the stock of Namibia’s international reserves stood at N$35.2 billion, compared to N$34.1 billion reported in the previous MPC statement.
“This amount of international reserves is estimated to cover 4.8 months of imports of goods and services. At this level, the reserves are sufficient to protect the peg of the Namibia Dollar to the South African Rand and meet the country’s international financial obligations” Shiimi said.
Another important announcement made by the BoN Governor was that Loan-To-Value (LTV) ratios have also been revised and will come into force after the gazetting of the revised Regulations Relating to Restrictions on LTV ratios: Banking Institutions Act, 1998 by the Minister of Finance.
The BoN implemented macroprudential tools in the form of maximum LTV ratios in 2017, in order to mitigate the impact of an overheating housing market on the financial system.
“Since the implementation, there have been some developments in the economy that that warranted a review of this policy. These developments include a significant slowdown in the economy and sharp correction in the housing market.”
The new LTV ratios will not have bearing on a lender’s primary home but the maximum LTV percentage have been increased to 90% on the first non-primary residence. The percentage on a second and further non-primary residences have also been increased to 80%.
According to Shiimi the adjusted LTVs will continue to shield the financial system from undue risks going forward.