In early 2020, keeping N $ 1,000 in a normal savings account would earn on average N $ 55.70 per year in bank interest, but in April of this year the return is only N $ 36.70 – thanks to the reduced repo rate.
At the start of Covid-19 last year, the Bank of Namibia made every effort to reduce the repo rate, lowering the prime rate accordingly to an all-time low of 3.75% and 7.5 %, respectively.
At the start of 2020, the repo rate was at 6.75% and the prime rate at 10.25%.
According to the bank at the time, the cuts were meant to give debt-ridden individuals and businesses a break, as restrictions imposed by Covid-19 resulted in an almost sudden shutdown of economic activities.
Data from the central bank show that more than 22,000 individuals and businesses requested some sort of debt relief, worth over N $ 9 billion in October last year.
While this was good for enabling people in debt, the relationship between the lending rate, the repo rate and the deposit rate suggests that when there is a decline in the repo rate, the income of the lender savings are also falling.
In this case, between January 2020 and April of this year. the average deposit rate fell from 5.57% to 3.67% – down 1.9 percentage points.
Namibians are generally savers, with over N $ 200 billion stranded in several savings platforms such as pension funds, bank savings accounts and other liquid instruments.
At the start of 2020, central bank statistics showed that there was N $ 3.3 billion in general savings accounts of commercial banks, and that figure has now dropped from N $ 400 million to 2, 9 billion Namibian dollars.
It is not clear whether this was due to the low interest rates on deposits or some other reason.
Recent reports from the International Monetary Fund indicate that the fall in repo rates should have been balanced and not just provided a break.
According to the IMF, central banks should better communicate the distributive effects of monetary policy.
Last year, all eyes were on the new Governor of the Bank of Namibia, Johannes! Gawaxab, with the big question of whether he would stick to the tradition of monetary policy or withdraw an additional instrument.
The market is still waiting for us to move away from the conventional way of using only monetary policy.
The IMF, in its article titled “Inequality Interest”, states that in countries with bank financial systems, people who hold their savings in bank deposits and are not in debt could lose monetary easing through the redistribution channel. savings.
This seems to have happened in Namibia.
According to the authors, given the widening income and wealth gaps and limited budget space in many countries, such as Namibia, monetary policy could do more harm, especially when it comes to correcting inequalities.
“The problem is that monetary policy is a blunt tool that is ill-suited to the challenges facing specific demographic or socio-economic groups,” the authors said.
It is also important for the central bank to better understand and account for differences between households within their existing policy frameworks, including through modeling and analysis of the distribution of income and wealth, the authors added.
The reduction in the repo rate also brought down profits for commercial banks, which then shifted their dependence from profits to bank charges.
This has to some extent negated the relief provided by commercial banks.
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