Monday, April 04, 2018 8:10 AM /BMI Research
BMI View: The Bank of Namibia will implement further monetary easing in 2018, cutting the policy rate by 25bps to 6.50%. Monetary easing will allow Namibian policymakers to support the country's one-to-one peg with the South African rand while stimulating the Namibian economy in an environment of low inflation.
The Bank of Namibia (BoN) is nearing, but has not yet reached, the end of its easing cycle. After having cut its benchmark interest rate in August 2017 by 25 basis points (bps) to 6.75%, we forecast that Namibian policymakers will implement a final cut of 25 bps in 2018, likely earlier in the year rather than later. In large part, the cut will come as the BoN continues to mirror the South Africa Reserve Bank (SARB)'s interest rate policy, in a bid to help support the Namibian dollar's peg to the South African rand. While the SARB had kept its policy rate on hold in the final months of the year, the election of business-friendly Cyril Ramaphosa as leader of South Africa's ruling African National Congress will likely spur South African policymakers to continue easing in 2018. Domestic factors will also provide both room and impetus for modest further easing in Namibia in the months ahead.
We anticipate inflation to remain within the BoN's target band of 3.0% to 6.0%, and while real GDP growth will begin to accelerate, it will remain relatively subdued. That said, while we are forecasting another cut to the benchmark policy rate in the year ahead, we expect Namibia's easing cycle to conclude in 2018, with economic activity and inflation forestalling further cuts.
BoN Will Continue To Follow The SARB's Monetary Policy Trajectory
Our 2018 forecast for one final rate cut in Namibia is largely predicated on our out-of-consensus view for further monetary easing in South Africa in H118. The Namibian dollar and the South African rand have a one-to-one peg, with the BoN typically mirroring the policy measures taken by the SARB to maintain parity. We forecast the SARB to cut its repo rate by 25 bps to 6.50% in H118 to stimulate its ailing non-agricultural sector amid improved investor sentiment (see 'Ramaphosa's Election Leaves Window Open For Final Cut', December 20 2017). This move will contribute to the BoN cutting its own interest rate, before gradual improvements in both countries' economic activity reduces the impetus for further easing
Sluggish Domestic Economy Will Further Motivate Easing
The BoN will be further motivated to cut its repo rate in 2018 due to domestic factors. Namibia's GDP growth has been near zero or negative since early 2016, with economic growth outside of the mining sector being particularly weak. While we expect an uptick in overall growth from an estimated contraction of 0.6% in 2017 to 3.5% in 2018, the non-mining sector will continue to struggle (see 'Mining Sector To Drive Economic Recovery In 2018', January 4). Broader weakness in the Namibian economy is reflected in the downward trend in loan growth, with growth standing at 7.6% y-o-y in August 2017, down from levels over 10.0% observed in previous years.
Moreover, cooling inflation will allow the BoN room to ease. We forecast that inflation will remain within the BoN's target range, after falling to 5.2% y-o-y in November 2017 from a peak of 8.2% in January. This comes as food prices have normalised on the back of stronger 2017 harvests in Southern Africa, with agriculture recovering after a regional drought.
Rates Will Be Held Before Hikes By 2019
Our forecast is for the BoN's rate cuts, alongside sustained growth in the mining sector and a more gradual acceleration of growth in other industries, to underpin an uptick in economic growth over H218 and 2019, limiting the impetus for further easing. We expect annual growth in client loans to increase from 8.0% in 2017 to 10.0% in 2018 and 11.5% in 2019, with monthly y-o-y inflation remaining within the target band at an average of 5.5% in both years. We see economic activity picking up while inflation remains stable over 2019, and with the ongoing normalisation of monetary policy in developed markets amid these conditions, both the SARB and BoN will be spurred to begin tightening their monetary policy by the end of 2019, with our forecast for their interest rates to increase to 7.0% then.