Monetary Policy Statement by the Bank of Namibia
1. The Bank of Namibia held its monetary policy meeting on 13 June 2008 to
deliberate and decide on an appropriate stance of monetary policy for the next
two months.
2. Underpinned by a sharp increase in international fuel prices and persistently
high food prices there has been a notable deterioration in the inflation
conditions in Namibia since the Bank’s last monetary policy meeting in April this
year. Consequently, the annual rate of consumer price inflation increased to 9.7
percent in May 2008 from 9.3 percent in April 2008 and from 8.4 percent in
March this year. Accelerating inflation is, however, not unique to Namibia, as
inflationary pressure has become a world-wide phenomenon, driven largely by
external factors. Even oil producing countries in the Middle East experience
high consumer prices inflation and in some instances have reported double digit
inflation.
3. In Namibia, inflation originating from sources other than food and fuel has risen
at a slower rate than overall inflation. This is mainly the result of weakened
domestic demand, which was induced by the restrictive nature of monetary
policy pursued since the middle of last year. However, domestic inflation shows
some signs of second-round effects emanating from rising fuel and food prices.
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The subsiding domestic demand is especially noticeable in the slowdown in
credit extended to the private sector by commercial banks. Annual growth in
total private sector credit extension stood at 12.1 percent in April 2008, which
was slightly down from 12.2 percent the month before. However, some
components of credit extension slowed more noticeable: In April 2007 growth in
instalment credit stood at 10.3 percent, compared to 5.1 percent in April 2008,
while growth in mortgage loans slowed from 26.2 percent to 11.7 percent and
asset-backed credit slowed from 21.9 percent to 10.1 percent over the same
time period. Other domestic demand indicators, such as vehicle sales and
building plans passed, have shown a similar sluggish trend.
4. The Bank of Namibia remains committed to price stability by conducting stability
oriented monetary policy embodied in the fixed exchange rate arrangement with
South Africa and all other objectives remain subservient to, but can best
attained through the exchange rate objective. Thus, protecting exchange rate
peg is the intermediate target of monetary policy for Bank of Namibia.
Accordingly, the Bank sets official interest rates at a level that it considers
sufficient to provide the necessary support for the exchange rate peg. A key
requirement to maintain and defend the currency peg is to hold sufficient
international reserves to at least cover currency in circulation. In this context,
there was a significant strengthening of the country’s foreign exchange reserves
since 2006. By the end of May 2008, Namibia’s foreign exchange reserves
stood at a healthy N$9.3 billion, which compares well with the currency in
circulation that stood at N$1.3 billion. This implies that foreign exchange
reserves were seven times higher than what is required to sustain the currency
peg.
5. It is further reassuring to note that, since the last two monetary policy meetings
when the Bank decided to leave the Bank rate unchanged compared to the
South African Repo rate, there were no adverse movements of capital flows
between Namibia and South Africa. In fact, since then there was a further
strengthening in the country’s overall reserves position suggesting that inflows
have been higher than outflows.

6. The Bank is also mindful of its secondary objective, namely to promote orderly
and balanced economic development by taking due regard to the current
economic conditions in the country. In this regard, it is reassuring to note that
the real sector is performing quite well under difficult circumstances, the fiscal
situation is healthy and supportive of monetary policy, and the current account
of the balance of payments continues to record strong surpluses.
7. Having considered all factors, the Bank of Namibia has decided to keep the
Bank rate unchanged 10.5 percent. It is believed that this decision does not
pose a threat to the country’s reserves outlook over the medium term.
However, at the same time the Bank of Namibia remains concerned about the
deteriorating inflation conditions, especially emanating from exogenous factors.
Should any of the underlying economic conditions pose a threat to the
maintenance of the currency peg, the Bank of Namibia will not hesitate to use
instruments at its disposal to defend the peg and thereby supporting price
stability.