BoN urged not to increase interest rates

30 January 2014 Author   Francis Xoagub

front BoN 31 janIt is a safe bet that the Bank of Namibia (BoN) will wait for a couple of months before it considers increasing interest rates, a local economist predicts. South Africa’s central bank on Wednesday raised its key interest rate, aiming to halt a rush out of its bonds and currency spurred by a run on faltering emerging-markets around the world.

Simonis Storm Securities (SSS) Economist Daniel Kavishe believes that the rand will weaken because the strength of the US dollar suggests possible earlier tapering of economic stimulus that appears to have had the opposite effect on the rand.

He said that the US tapering programme had created large money flows from emerging markets to developed markets and as a result, the rand had not improved and there was no indication that it would improve in the near future.

“When you try to control the value of a currency by increasing interest rates it’s a very sticky exercise. You are at the mercy of liquid market for international investors. Sometimes they won’t buy that you have increase interest rates,” Kavishe noted.

“I don’t really see any reason why they should increase their interest rates. My feeling is it would be wise to see what the fallout might be from the rise in interest rates in South Africa.

“They have done this before. Most people believe that it’s automatic that if South Africa increases Namibia has to follow suite.

“There are moments that you are actually leveraging how the markets truly react to the increase in the interest rates,” he said.

He explained that the rationale behind the idea to increase the rates was to increase capital inflow into the country.

“That’s how the currency starts appreciating. But in this particular instance it is hard to state that more money would come into Namibia because there are too many other factors that come into play,” he said.

He added that low interest rates are part of a deliberate policy by central banks to discourage saving and encourage borrowing.

“It has also been seen as a way of boosting the stock market and thus creating a wealth effect for individuals, and boosting confidence.”

Kavishe noted that as Namibia currency is linked to the rand and the country therefore needs to observe what the rand is going to do over next couple of weeks.

In terms macroeconomics Namibia has performed better than South Africa and the country is already in line to have investors coming into the country, especially in the manufacturing sectors.

“Investors putting money into the Namibian economy may not be necessarily be in response to what is happening in South Africa. Namibia’s economic outlook looks promising compared to of South Africa,” he added.

In the past week, the ground has shifted in the global economy. Investors have hammered South Africa and other emerging markets with wide current-account deficits and domestic political problems.

Facing similar pressures, India’s central bank raised its key rate by 0.25 percentage points on Tuesday to 8 percent. Turkey’s central bank increased its overnight lending rate to 12 percent from 7.75 percent, and its repo rate to 10 percent from 4.5 percent.

As the U.S. Federal Reserve dials back its expansive bond-buying program, traders expect Treasury yields to rise, giving them less incentive to shoulder the increased political risks that come with higher yields on emerging-market assets.

South Africa has been among the hardest hit. The currency, the rand, fell more than 5 percent against the U.S. dollar this month – on top of a 24 percent decline in 2013 – and foreign investors have pulled $1.7 billion out of South African stocks and bonds.
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