Namibia’s central bank increased its key interest rate by the biggest margin since 2007 to safeguard its currency peg with South Africa’s rand and stymie inflation.
The monetary policy committee increased the rate by 50 basis points to 4.75%, Governor Johannes !Gawaxab told reporters in the capital, Windhoek, on Wednesday.
“The decision was taken with due consideration of the persistent inflationary pressures, to safeguard the one-to-one Namibian dollar-rand peg and to narrow the negative real policy interest rate that is conducive to long-term economic growth,” Johannes !Gawaxab
The governor said that price pressures fueled by supply-chain disruptions are expected to continue, and inflation for food and transport is likely to remain elevated and have a disproportionate impact on low-income households.
Inflation quickened to a five-year high of 5.6% in April before ebbing slightly to 5.4% in May stoked by surging food and pump prices due to the depreciation in the Namibian dollar against the greenback and tightened global supply caused by the war in Ukraine and extreme weather. The central bank sees inflation averaging 5.9% this year, down from its previous forecast of 6%.
International reserves stood at 43.9 billion Namibian dollars ($2.7 billion) at the end of May, compared with 40.8 billion Namibian dollars at the end of March. That’s enough to cover 5.4 months of imports and sufficient to help maintain the currency peg, Johannes !Gawaxab.
While the hike and the nation’s reserves should safeguard its currency peg, tame inflation and bolster the attractiveness of local assets to offshore investors lured by higher interest rates in the US and other developed markets, it may dent an already fragile economic recovery. Namibia’s economy has contracted in eight of the past 12 quarters.
The bank left its economic growth forecast unchanged at 3%.