BoN monetary policy spurs controversy

“I find it odd to question commercial banks responding to monetary policy in the way they should, given the increase in the policy rate, as this is precisely the mechanism by which lower inflation is to be achieved,” a local analyst said.

The fact that local commercial banks are not compelled to increase the prime lending rate when the Bank of Namibia (BoN) hikes the repo rate, defeats the purpose of monetary policy adjustments, the head of research at Cirrus Capital Robert McGregor pointed out.

At the second monetary policy announcement in April, the governor of the Bank of Namibia Johannes !Gawaxab stated that it is not a must for commercial banks to hike the prime lending rate when the central bank hikes the repo rate.

This raised questions on how the central bank will monitor demand-driven inflation, given that interest rates influence money demand.

Responding to a Market Watch enquiry, BoN’s spokesperson Kazembire Zemburuka pointed out that to combat inflation, the central bank sets a policy rate, specifically the repo rate, which impacts how businesses price their products and how households spend their money in the medium term.

Currency

Market Watch viewed BoN’s response as conflicting because, on one hand, the central bank says that commercial banks are not compelled to hike the prime lending rate when BoN hikes the repo rate, while at the same time, arguing that the central bank sets a policy rate, which impacts how businesses price their products and how households spend their money.

According to McGregor, “While inflation is a concern for our central bank, as many other central banks, the currency peg arrangement makes this different for Namibia than other jurisdictions. This complicates matters somewhat, as we need to set a policy rate that caters to domestic economic conditions such as private sector credit uptake, inflation and economic growth, while balancing the exchange rate impact, by ensuring sufficient hard currency reserves to guarantee the peg and not drive capital outflows.”

McGregor further stated that while commercial banks are not compelled to change their lending rates when the central bank changes its rates, this is the very mechanism that the central bank is trying to utilize to control demand and inflation.

In conclusion, McGregor argued that while banks are not compelled to follow the monetary policy decision, this is what makes it effective. “While sentiment might be this way with interest rates on the rise, would we feel the same if banks were not cutting rates were the Bank of Namibia’s monetary policy committee (MPC) to cut rates? Commercial banks following the policy rate is what gives it its effect, if not, we run the risk of having weak monetary policy,” he [email protected]