Namibia's central bank raised its benchmark repo rate by 25 basis points to 6.75 percent to align interest rates with those of South Africa, with the bank saying this "decision was necessary to avoid possible capital outflows, which could put pressure on the country's reserves."
The Bank of Namibia, which raised its rate by 50 basis points in 2015, added that its monetary policy committee welcomed the continued slowdown in the growth of installment credit but also expressed its concern over the recent "significant increases" in other loans and advances.
Namibia, South Africa, Lesotho and Swaziland are part of the Common Monetary Area (CMA) that was formed in 1986, with the Namibian dollar exchanged at par with the South African rand.
Economists had expected Namibia's central bank to raise its rate following the South African Reserve Bank's 50-basis point rate hike on Jan. 28 to 6.75 percent in response to a deteriorating outlook from inflation, mainly from a depreciation of its rand.
At its last meeting in December, Namibia's central bank had noted the downward trend in installment credit, with growth in Private Sector Credit Extension (PSCE) growing by 15.3 percent in 2015 as compared to 15.7 percent in 2014 and installment credit to individuals slowing to 14.1 percent in December from a high of 23.5 percent in February last year.
However, the central bank added that growth in other loans and advances had risen to 20.9 percent in December from 17.5 percent.
"Although the annual inflation rate remained low and stable in 2015, it rose in January 2016 and is expected to rise further for the most part of 2016," the central bank said.
Namibia's inflation rate jumped to 5.3 percent in January from 3.7 percent in December, with the depreciation of the Namibian dollar against the U.S. dollar somewhat reversing the downward pressure on inflation from low international oil prices. The country's average inflation rate for 2015 eased to 3.4 percent from 5.4 percent in 2014.
Namibia's dollar depreciated by 25 percent against the U.S. dollar in 2015 but since Jan. 20 it has been appreciating and rose further in response to today's rate hike. The NAD was trading at 15.66 to the U.S. dollar, slightly down from 15.5 at the start of the year but up 7.2 percent from Jan. 20.
"The stock of international reserves remain sufficient to sustain the one-to-one link of the Namibia dollar to the South African Rand," the central bank said, noting reserves of N$27.4 billion as of Feb. 11 compared with N$23.0 in December for the equivalent of 5.8 times currency in circulation and enough for 3.5 months of imports.
Namibia's economy slowed in 2015 in response to a decline in the mining sector and a reduction in agricultural output due to drought. Namibia is the world's largest producer of offshore diamonds and a major producer of uranium.
In the third quarter of 2015 growth in Gross Domestic Product eased to an annual 3.5 percent from 6.0 percent the preceding two quarters and the central bank forecast 2016 growth of 4.3 percent from an estimated 4.5 percent last year.
The central bank is looking for good growth across all industries, but noted the risks from soft commodity prices, drought and a slow recovery of its trading partners.