By Koviao Matuzee
The Bank of Namibia has raised its benchmark interest rate to seven (7) percent, tightening monetary policy as rising fuel prices drive inflation higher and threaten to erode household spending power in an economy already struggling to gain momentum.
The 25-basis-point increase, announced recently, raises the prime lending rate to 10.50 percent from 10.25 percent, potentially increasing the cost of servicing loans for households and businesses while adding pressure to consumers already grappling with expensive transport and other essential goods.
The decision exposes a difficult balancing act for policymakers: protecting the Namibia dollar’s one-to-one link with the South African rand while containing inflation without further weakening an already subdued domestic economy.
The Monetary Policy Committee (MPC) of the central bank said the increase was necessary to safeguard the currency peg and limit the secondary effects of higher fuel prices on domestic inflation.
The move follows mounting inflationary pressures and a September interest rate increase by the South African Reserve Bank, which raised its repo rate to 7.25 percent.
Namibia’s annual inflation accelerated to 5.4 percent in September, up one percentage point from June, largely reflecting higher transport costs.
Inflation averaged 3.8 percent during the first nine months of the year, compared with 3.6 percent during the corresponding period in 2025.
The central bank expects inflation to rise to 4.2 percent for 2026, from 3.5 percent last year, before easing slightly to four (4) percent in 2027.
Both projections have been revised upwards as the Bank accounts for a prolonged energy price shock.
The pressure extends beyond fuel purchases.
Higher transport and operating costs can feed into the prices of goods moved across the country, leaving households with less money for other necessities and businesses facing difficult decisions about whether to absorb additional expenses or pass them on to customers.
The latest figures suggest the shock is also weighing on the country’s external trade position.
Namibia’s merchandise trade deficit widened to N$33.5 billion during the first eight months of 2026, compared with N$17.8 billion during the same period last year.
The central bank attributed the deterioration largely to increased imports, particularly mineral fuels, amid higher energy prices.
Brent crude oil recently surged to approximately US$116 a barrel, its highest level in more than six months, as tensions in the Middle East intensified.
For a country dependent on imported fuel, prolonged price increases threaten to sustain inflation even as tighter monetary policy makes borrowing more expensive.
Meanwhile, the economic growth outlook remains fragile. The Bank projects the economy to expand by 2.1 percent in 2026, improving to 2.8 percent in 2027, with anticipated recoveries in agriculture and manufacturing.
However, the outbreak of foot-and-mouth disease has emerged as an additional downside risk.
The rate increase could therefore create a difficult trade-off for households and businesses relying on credit. Higher borrowing costs may discourage spending and investment, while elevated prices continue to squeeze purchasing power.
There are, nevertheless, signs of resilience. Private sector credit extension growth accelerated to 5.4% in August, up 0.9 percentage points from June, reflecting increased borrowing by businesses and households.
International reserves also rose to N$59.3 billion at the end of September, from N$58 billion at the end of July, providing an estimated 3.6 months of import cover.
The Bank said reserves remained adequate to support the currency peg and meet international financial obligations.
The MPC unanimously approved the rate increase after considering economic developments and the need to narrow the interest rate gap with South Africa to discourage potential capital outflows.
