Real policy interest rate now neutral
Both repo and inflation rate at 7%
The prime lending rate for local commercial banks currently stands at 10.75%.
Phillepus Uusiku
The Bank of Namibia (BoN) announced a 25 basis points (bps) increase in the repo rate from 6.75% to 7%, hiking the prime lending rate from 10.5% to 10.75%.
The Namibia Statistics Agency (NSA) also announced that annual inflation came in at 7% in January 2023. Hence, the real policy interest rate (repo rate-inflation) or (7%-7%) is now neutral (0).
MarketWatch last year reported that before one takes a decision to save or invest, it is very important to take real interest rates into considering as there could be an incentive to spend the money now.
Real interest rates are nominal interest rates which are adjusted for inflation and give individuals an indication of time preference because money loses value over time due to inflation.
Therefore, real interest rates are positive when interest earned on savings is above inflation. In addition, real interest rates are negative when interest earned on savings is below inflation.
According to the Head of Research at Cirrus Capital Robert McGregor, if savers are seeing negative real rates, then they are in fact losing purchasing power on these investments. If real interest rates on savings are positive, this should incentivize saving or investing rather than spending.
The Head of Research at IJG Securities Danie van Wyk also concurred with McGregor’s views. “When real rates are low, income usage will generally shift from saving to consumption, and investment in physical goods should increase. On the contrary, when real rates are high, the usage of income will move from consumption to saving, as fewer people or businesses are willing to take out loans, due to it being more expensive. High real rates are favoured by investors and savers, as it means that the growth of their money outpaces inflation, and increases their purchasing power,” van Wyk said.
Borrowing
On the other hand, real rates are also a consideration for borrowers. If borrowers are facing negative real interest rates, they are theoretically incentivized to borrow money as inflation is helping them repay their debt. However, banks will be receiving a negative real interest rate and thus less likely to lend. If more people borrow money to spend it, then that could also have an impact on inflation. Again, this is something that inflation-targeting central banks like the South African Reserve Bank (SARB) consider when setting monetary policy, McGregor pointed out.
Since 2000, the real prime rate in Namibia has remained positive. Using the current figures, the real prime lending rate is 3.75% (10.75%-7%).
In period of high inflation many central banks have hiked their policy rate to levels above inflation, which should encourage saving and discourage borrowing, thereby helping reduce demand in the economy and eventually causing inflation to slow down, McGregor said.
[email protected]
The Bank of Namibia (BoN) announced a 25 basis points (bps) increase in the repo rate from 6.75% to 7%, hiking the prime lending rate from 10.5% to 10.75%.
The Namibia Statistics Agency (NSA) also announced that annual inflation came in at 7% in January 2023. Hence, the real policy interest rate (repo rate-inflation) or (7%-7%) is now neutral (0).
MarketWatch last year reported that before one takes a decision to save or invest, it is very important to take real interest rates into considering as there could be an incentive to spend the money now.
Real interest rates are nominal interest rates which are adjusted for inflation and give individuals an indication of time preference because money loses value over time due to inflation.
Therefore, real interest rates are positive when interest earned on savings is above inflation. In addition, real interest rates are negative when interest earned on savings is below inflation.
According to the Head of Research at Cirrus Capital Robert McGregor, if savers are seeing negative real rates, then they are in fact losing purchasing power on these investments. If real interest rates on savings are positive, this should incentivize saving or investing rather than spending.
The Head of Research at IJG Securities Danie van Wyk also concurred with McGregor’s views. “When real rates are low, income usage will generally shift from saving to consumption, and investment in physical goods should increase. On the contrary, when real rates are high, the usage of income will move from consumption to saving, as fewer people or businesses are willing to take out loans, due to it being more expensive. High real rates are favoured by investors and savers, as it means that the growth of their money outpaces inflation, and increases their purchasing power,” van Wyk said.
Borrowing
On the other hand, real rates are also a consideration for borrowers. If borrowers are facing negative real interest rates, they are theoretically incentivized to borrow money as inflation is helping them repay their debt. However, banks will be receiving a negative real interest rate and thus less likely to lend. If more people borrow money to spend it, then that could also have an impact on inflation. Again, this is something that inflation-targeting central banks like the South African Reserve Bank (SARB) consider when setting monetary policy, McGregor pointed out.
Since 2000, the real prime rate in Namibia has remained positive. Using the current figures, the real prime lending rate is 3.75% (10.75%-7%).
In period of high inflation many central banks have hiked their policy rate to levels above inflation, which should encourage saving and discourage borrowing, thereby helping reduce demand in the economy and eventually causing inflation to slow down, McGregor said.
[email protected]
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