BoN tipped to hike rates

The Bank of Namibia (BoN) is expected to raise its key interest rate by 0.25 percentage points to 7% on Wednesday, as rising inflation and pressure to maintain the currency peg with South Africa strengthen the case for tighter monetary policy.

Standard Bank Namibia group economist Helena Mboti, in a monetary policy preview published on 23 October, expects the Monetary Policy Committee (MPC) to increase the repo rate from its current 6.75% at its meeting on 28 October.

The anticipated increase follows the South African Reserve Bank’s decision to raise its repo rate by 0.25 percentage points to 7.25% in September.

A move by the BoN would narrow the interest rate gap between the two countries from 0.5 percentage points to 0.25 percentage points, helping to support the one-to-one link between the Namibia dollar and the South African rand.

Inflationary pressures have intensified since the previous MPC meeting, with Namibia’s annual inflation rate accelerating to 5.4% in September from 5% in August.

International oil prices have also remained elevated, trading at around US$110 a barrel, compared with levels below US$100 earlier in the year.

As a net importer, Namibia is particularly exposed to rising international prices through fuel, transport and other energy-intensive goods and services. Higher costs could also spread to other parts of the economy, increasing the risk of broader inflationary pressures.

The central bank has revised its 2026 inflation forecast upwards by 0.4 percentage points to 4%, while the latest developments suggest that the risks to the outlook remain tilted towards higher prices.

The inflation outlook is expected to be a central consideration for policymakers, particularly as the bank has identified price stability as its primary objective.

External pressures

Namibia’s external position has also come under pressure, with import growth continuing to outpace export growth.

Data from the Namibia Statistics Agency show that imports increased by 12.9% year-on-year in the second quarter of 2026, while exports grew by just 0.3%.

The widening trade imbalance could be compounded by the effects of El Niño conditions and foot-and-mouth disease on agricultural production and exports in the second half of the year.

These developments raise concerns about the country’s foreign exchange reserves, which support the currency peg and help finance international transactions.

The Bank of Namibia has reported that import cover remained between three and four months during 2026, only modestly above the Southern African Customs Union benchmark of three months.

Against this backdrop, allowing the interest rate differential with South Africa to widen further could increase pressure on the country’s external position.

Growth versus inflation

Economic growth presents a counterargument to an interest rate increase.

Although second-quarter gross domestic product growth was revised upwards, the outlook for the remainder of the year has weakened amid risks to agriculture and other productive sectors.

However, Mboti argues that the Bank has consistently maintained that the existing policy stance is sufficiently accommodative to support economic activity.

Lower interest rates would also do little to address supply-side disruptions caused by livestock disease, adverse weather conditions and higher imported energy costs.

The balance of risks therefore favours a tighter monetary policy stance, particularly as inflation accelerates and the Bank seeks to maintain alignment with South Africa.

Outlook

Mboti expects interest rates to remain broadly unchanged through most of 2027, with scope for a reduction in the second half of the year if inflation moderates as anticipated.

However, the outlook remains uncertain. Persistently high oil prices or a further deterioration in inflation could prompt additional tightening.

For households and businesses, a repo rate increase would mean higher borrowing costs at a time when fuel, transport and other operating expenses are already under pressure.

The MPC’s decision on Wednesday will therefore balance the need to contain inflation and protect the currency peg against the risks that higher interest rates could pose to an already fragile economic recovery.