Exogenous factors fuelling inflation

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Namibia’s central bank (BoN) said Wednesday that 65 per cent of its inflation was imported, adding that exogenous market forces have dampened authorities’ optimism in clamping down on rising inflation.

The central bank said that there were no excessive domestic demand conditions to fuel inflation to its current two-digit level.

Namibia’s annual rate of inflation surged to 11.9 per cent in July against 7.2 per cent recorded in the same month in 2007.

BoN governor Tom Alweendo said the bulk of inflationary pressures in Namibia, a net importer of food and petroleum, were imported.

Alweendo said that the central bank had been successful in throttling down domestic price pressures when it raised its benchmark rate by 350 basis points to 10.5 per cent since June 2006, roughly in line with South Africa’s rate increases, to try and contain inflationary pressures.

According to him, despite effectively slowing down credit growth, inflation has continued its upward trend.

“Currently there are no signs of excessive domestic demand conditions in Namibia and underlying inflationary pressures have primarily been driven by exogenous factors, including high international oil and food prices,” Alweendo said.

Food and fuel prices have risen internationally and have pushed up inflation in neighbouring South Africa, to which the Namibian economy is closely tied through its rand peg and joint membership of the Southern African Customs Union (SACU).

South Africa’s inflation has hit double-digit figures since May this year and analysts warn that it has not yet reached its peak.

“This creates challenges for us where monetary policy actions are not likely to impact the exogenous factors, but the same factors are likely to impact inflation expectations,” Alweendo said.

He pointed out that the current commodities price boom had boosted Namibia’s external current account position through record exports of uranium and zinc.

“However, surging oil and food prices have had a significant upward pressure on import costs and inflation in Namibia,” the governor noted.

Alweendo said that key target of Namibia’s monetary policy stance was the currency peg, which could only come under threat if the current account balance was negative.

A key requirement of the peg is the need to have sufficient reserves to maintain the peg, he said, adding that the central bank would only raise the rates when there was a threat to the currency peg.

“If the bank is convinced that there are no inflationary pressures due to domestic demand, it will mainly act if there is a threat to maintaining the currency peg.”

The bank said that foreign currency reserves for July were enough to cover, seven times, the amount of currency in circulation. Panapress.

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