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By Kaula Nhongo
(Bloomberg) – The central bank of Namibia, whose currency is pegged to South Africa’s, diverged from its neighbour’s moves on monetary policy for the first time in two years as the country seeks to balance supporting its economy with safeguarding investment inflows.
The monetary policy committee cut the repurchase rate to 4% from 4.25%, Deputy Governor Ebson Uanguta said on Wednesday as he read the panel’s decision in a virtual media briefing. While that brings the cumulative reductions this year to 250 basis points, the move is smaller than that of the South African Reserve Bank, which lowered its benchmark by 50 basis points to 3.75% last month.
The decision to veer away from South Africa coincides with the first MPC meeting that was led by the new governor, Johannes !Gawaxab, who took the reins at the Windhoek-based central bank at the start of June. !Gawaxab, who was not present at Wednesday’s announcement, replaced Ipumbu Shiimi, who was governor for a decade before being appointed as finance minister in March.
The cut will provide some relief to the southern African nation’s economy that’s contracted for nine of the last 16 quarters. Gross domestic product could shrink by 6.9% this year, Uanguta said. While inflation picked up in May after dropping to a 15-year low the previous month, the central bank in most cases follows its South African counterpart to help maintain the currency peg.
“The MPC had to balance the need for further monetary stimulus in the face of the pandemic-induced weakness in the economy, against the importance to not undermine sound saving and investment decisions in the economy,” Uanguta said. “At 4% the repo rate is appropriate to support domestic economic activity while at the same time safeguarding the one-to-one link between the Namibian dollar and the South African rand.
South Africa controlled Namibia from World War I to 1990. The Namibian dollar’s peg to the rand makes the nation’s economy vulnerable to a decline in export earnings when the South African currency appreciates against the greenback. After dropping to a record against the US dollar in April, the rand has gained more than 9% since the start of May.
International reserves rose to 33.7 billion Namibian dollars ($1.96bn) at the end of last month. That’s enough to cover 5.1 months’ imports and sufficient to help maintain the currency peg, the MPC said.
The central bank also wants to take advantage of a slightly higher rate in Namibia to help curb capital outflows to South Africa with its more advanced financial markets, Uanguta said.
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