## 1. Understanding interest rate pass-through is important under a pegged exchange rate regime. ## Source details **Canonical URL:** [1. Understanding interest rate pass-through is important under a pegged exchange rate regime.](https://www.imf.org/-/media/files/publications/selected-issues-papers/2026/english/sipea2026060.pdf) ## Other formats - [Markdown version](/-/media/files/publications/selected-issues-papers/2026/english/sipea2026060.pdf.md) - [Structured JSON version](/-/media/files/publications/selected-issues-papers/2026/english/sipea2026060.pdf.json) --- ### Summary and motivation - Namibia is a member of the Common Monetary Area (CMA) and maintains a one-to-one peg of the Namibian dollar to the South African rand, which sharply constrains monetary policy autonomy. - Under the peg, the exchange rate channel is stabilized through interest rate adjustments; the interest rate channel—particularly pass-through to bank lending and deposit rates—is the primary transmission mechanism. - This paper examines transmission to aggregate banking interest rates and the extent to which interest rate dynamics are driven by the SARB policy rate rather than the BoN repo rate, given limited empirical evidence for Namibia. ### Context: monetary policy framework and market structure - The Bank of Namibia’s (BoN) policy rate is the seven‑day repo rate, set on a full-allotment basis. - The Prime Lending Rate (PLR) is currently mandated by the BoN at 3.5 percentage points above the policy rate. - The PLR margin was gradually reduced by the BoN from 375 basis points (maintained from November 2010) to approximately 350 basis points since September 2025. - In practice, BoN bills (seven‑, fourteen‑, and twenty‑one‑day) are issued at variable allotment with yields often set above the repo rate and tending to track the SARB’s CPD rates more closely. - Co‑movement between the BoN repo rate and the SARB policy rate changed: prior to 2021 BoN repo rate closely tracked SARB; since early 2022 co‑movement weakened as the SARB tightened and the BoN did not fully match increases. - A negative policy rate differential—BoN repo rate below the SARB rate—stands at 25 basis points (as of April 2026), having widened to as much as 100 basis points at the peak. - Structural and regulatory features potentially dampening capital mobility and asset substitutability: - Pension funds and long‑term insurers face explicit domestic asset requirements mandating that at least 45 percent of assets be invested in Namibian instruments. - Banks face prudential liquidity regulations, collateral eligibility constraints in BoN operations, limits on foreign exposures, and shallow secondary markets. - Financial sector size (end-2025): - NBFI assets: NAD 552.8 billion, or 205.0 percent of GDP. - Banking system assets: NAD 228.0 billion, or 84.5 percent of GDP. - Private sector credit growth remains subdued following the COVID-19 contraction; credit-to-GDP ratio and year-on-year credit growth are subdued even as monetary policy eased since mid-2024. - Lending interest rates typically follow a floating-rate convention tied to the PLR; loans repricing occurs automatically for outstanding loans when the repo rate changes, while rates on new loans depend on bank discretionary margins over the PLR. - Deposit rates are heterogeneous: retail deposits and wholesale funding differ in responsiveness; marginal funding costs are influenced by BoN bill rates, Namibian government securities yields, and South African benchmarks (SARB policy rate and short-term Johannesburg interbank rates). ### Empirical strategy and data - Objective: estimate pass‑through from SARB policy rate changes and from the policy rate differential (domestic policy rate minus SARB rate) to aggregate lending and deposit rates. - Data: monthly average lending and deposit interest rate series for June 2017–September 2025, provided by the Bank of Namibia. Rates are constructed from the four largest banks, weighted by share of total banking assets. - Method: local projections (LP) framework of Jordà (2005), estimating for horizons h = 0,1,...,H the response of lending or deposit rates to SARB policy rate shocks and to the policy rate differential. - Regression controls: two lags of outcome variables, two lags of SARB rates and policy rate differentials, same period and two lags of CPI inflation and three‑month domestic treasury bill yields. - Standard errors: HAC (Newey‑West) covariance estimator adjusted for small-sample size. - Identification relies on relative exogeneity of SARB policy decisions under South Africa’s inflation‑targeting framework and exploits episodic imperfect co‑movement between BoN and SARB rates to separate effects; estimates tied to the policy rate differential should be interpreted with caution given infrequency of such episodes. ### Main empirical findings (aggregate pass‑through) - Aggregate pass‑through from SARB policy rate changes to average lending rates is strong and complete: - Changes in the SARB policy rate transmit rapidly and fully to average lending rates; pass‑through is essentially complete within one month. - Innovations in the domestic policy rate differential have weaker and less persistent effects on average lending rates; SARB rate movements exert larger and more persistent influences. - Pass‑through is asymmetric across bank rates: - Lending rates: strong and complete pass‑through, reflecting prevalence of variable‑rate contracts and linkage to the prime rate. - Deposit rates: slower and incomplete pass‑through, reflecting differences in funding structures and pricing behavior across banks. - The bank interest rate margin (difference between average lending and deposit rates) has widened since early 2022, coinciding with the opening of a negative policy rate gap: - Widening driven primarily by a growing gap between deposit rates and the repo rate. - Gap between lending rates and the repo rate has fluctuated within a relatively narrow range of about 3 –4 percentage points with no clear trend. - Aggregate interest rate dynamics reflect both BoN repo rate and SARB policy rate influences, with SARB shocks driving aggregate lending-rate responses more strongly. ### Deposit rate pass‑through - Following a change in the SARB policy rate, average deposit rates adjust gradually, reaching about 90 percent pass‑through after three months. - Pass‑through from domestic policy rate differentials is more muted, with smaller point estimates and shorter persistence. - Aggregate results highlight the dominant role of the anchor‑currency policy rate (SARB) in shaping system‑wide deposit interest rates, while domestic policy actions exert a more limited influence at the aggregate level. ### Asymmetry across lending and deposit rates — implications - Pass‑through to lending rates is strong and complete; pass‑through to deposit rates is slower and incomplete. - Consequences: - Changes in policy rates affect borrowing costs more rapidly and more fully than deposit remuneration. - Bank interest rate margins are compressed during easing cycles, which may dampen the policy signal for easing lending conditions. - Margins are expanded during tightening cycles, dampening the signal for tightening credit conditions. ### Conclusions and policy implications - The SARB policy rate plays a dominant role; both lending and deposit rates are more responsive to changes in the SARB policy rate than to those in the BoN policy rate. - Deviations in the BoN repo rate influence average domestic interest rates through automatic repricing of variable‑rate loans, but their effects are weak and short‑lived. - Implications of limited scope for independent monetary policy under a pegged exchange rate with free capital flows and strong financial ties to the anchor country: - A persistent policy rate gap may create scope for arbitrage, as large corporates can shift borrowing or fund placement between Namibia and South Africa. - Keeping the policy rate below that of the SARB will have limited effects on stimulating lending because banks may be reluctant to lower lending rates given compressed interest rate margins, and lower domestic rates may create incentives for large corporates to move excess funds abroad. - Raising the policy rate above that of the SARB may have limited effectiveness in cooling domestic demand as large corporates can choose to borrow abroad and it could attract capital inflows. - Carefully calibrating the alignment of the BoN policy rate with the SARB rate could help reduce the bifurcated structure of bank funding and avoid distortions from rate misalignment. - Structural constraints beyond the monetary policy rate matter for credit developments, including: - Limited housing supply. - Scarcity of viable investment opportunities for business lending. - The monetary policy rate is not the right tool to address these structural issues. - Reforms to improve monetary transmission: - Effectively manage excess liquidity through systematic, predictable, and transparent absorption at rates aligned with the BoN policy rate. - Such reforms could help improve saving incentives and narrow interest rate margins. ### Data and measurement considerations - Aggregate lending and deposit rates may mask substantial heterogeneity in pricing dynamics across loan types, borrower segments, and funding sources. - When a large share of lending is at variable rates and new lending conditions differ from repricing of the existing loan stock, aggregate measures can be misleading. - More granular, loan‑level data would: - Allow clearer distinction between pass‑through at origination and pass‑through through automatic repricing. - Help identify which loan and deposit types are driving observed aggregate dynamics. *Source: sipea2026060* ### 1. Understanding interest rate pass-through is important under a pegged exchange rate regime. ### 1. Understanding interest rate pass-through is important under a pegged exchange rate regime. ### Summary and motivation - Namibia is a member of the Common Monetary Area (CMA) and maintains a one-to-one peg of the Namibian dollar to the South African rand, which sharply constrains monetary policy autonomy. - Under the peg, the exchange rate channel is stabilized through interest rate adjustments; the interest rate channel—particularly pass-through to bank lending and deposit rates—is the primary transmission mechanism. - Empirical evidence on interest rate pass-through in Namibia is limited; this paper examines transmission to aggregate banking interest rates and the extent to which interest rate dynamics are driven by the SARB policy rate rather than the BoN repo rate. ### Context: monetary policy framework and market structure - The Bank of Namibia’s (BoN) policy rate is the seven‑day repo rate, set on a full-allotment basis. - The Prime Lending Rate (PLR) is currently mandated by the BoN at 3.5 percentage points above the policy rate. - The PLR margin was gradually reduced by the BoN from 375 basis points (maintained from November 2010) to approximately 350 basis points since September 2025. - In practice, BoN bills (seven‑, fourteen‑, and twenty‑one‑day) are issued at variable allotment with yields often set above the repo rate and tending to track the SARB’s CPD rates more closely. - Co‑movement between the BoN repo rate and the SARB policy rate changed: prior to 2021 BoN repo rate closely tracked SARB; since early 2022 co‑movement weakened as the SARB tightened and the BoN did not fully match increases. - A negative policy rate differential—BoN repo rate below the SARB rate—stands at 25 basis points (as of April 2026), having widened to as much as 100 basis points at the peak. - Structural and regulatory features potentially dampening capital mobility and asset substitutability: - Pension funds and long‑term insurers face explicit domestic asset requirements mandating that at least 45 percent of assets be invested in Namibian instruments. - Banks face prudential liquidity regulations, collateral eligibility constraints in BoN operations, limits on foreign exposures, and shallow secondary markets. - Financial sector size (end-2025): - NBFI assets: NAD 552.8 billion, or 205.0 percent of GDP. - Banking system assets: NAD 228.0 billion, or 84.5 percent of GDP. - Private sector credit growth remains subdued following the COVID-19 contraction; credit-to-GDP ratio and year-on-year credit growth are subdued even as monetary policy eased since mid-2024. - Lending interest rates typically follow a floating-rate convention tied to the PLR; loans repricing occurs automatically for outstanding loans when the repo rate changes, while rates on new loans depend on bank discretionary margins over the PLR. - Deposit rates are heterogeneous: retail deposits and wholesale funding differ in responsiveness; marginal funding costs are influenced by BoN bill rates, Namibian government securities yields, and South African benchmarks (SARB policy rate and short-term Johannesburg interbank rates). ### Empirical strategy and data - Objective: estimate pass‑through from SARB policy rate changes and from the policy rate differential (domestic policy rate minus SARB rate) to aggregate lending and deposit rates. - Data: monthly average lending and deposit interest rate series for June 2017–September 2025, provided by the Bank of Namibia. Rates are constructed from the four largest banks, weighted by share of total banking assets. - Method: local projections (LP) framework of Jordà (2005), estimating for horizons h = 0,1,...,H the response of lending or deposit rates to SARB policy rate shocks and to the policy rate differential. - Regression controls: two lags of outcome variables, two lags of SARB rates and policy rate differentials, same period and two lags of CPI inflation and three‑month domestic treasury bill yields. - Standard errors: HAC (Newey‑West) covariance estimator adjusted for small-sample size. - Identification relies on relative exogeneity of SARB policy decisions under South Africa’s inflation‑targeting framework and exploits episodic imperfect co‑movement between BoN and SARB rates to separate effects; estimates tied to the policy rate differential should be interpreted with caution given infrequency of such episodes. ### Main empirical findings (aggregate pass‑through) - Aggregate pass‑through from SARB policy rate changes to average lending rates is strong and complete: - Changes in the SARB policy rate transmit rapidly and fully to average lending rates; pass‑through is essentially complete within one month. - Innovations in the domestic policy rate differential have weaker and less persistent effects on average lending rates; SARB rate movements exert larger and more persistent influences. - Pass‑through is asymmetric across bank rates: - Lending rates: strong and complete pass‑through, reflecting prevalence of variable‑rate contracts and linkage to the prime rate. - Deposit rates: slower and incomplete pass‑through, reflecting differences in funding structures and pricing behavior across banks. - The bank interest rate margin (difference between average lending and deposit rates) has widened since early 2022, coinciding with the opening of a negative policy rate gap: - Widening driven primarily by a growing gap between deposit rates and the repo rate. - Gap between lending rates and the repo rate has fluctuated within a relatively narrow range of about 3 –4 percentage points with no clear trend. - Aggregate interest rate dynamics reflect both BoN repo rate and SARB policy rate influences, with SARB shocks driving aggregate lending-rate responses more strongly. ### Implications and policy‑relevant insights - Under the exchange rate peg, the exchange rate channel is not an independent policy instrument; interest rate transmission—especially pass‑through to lending and deposit rates—determines monetary policy effectiveness. - Strong, rapid, and near‑complete pass‑through from SARB policy rate to lending rates implies that Namibia’s borrowing costs closely track South African monetary policy despite BoN actions. - Slower and incomplete pass‑through to deposit rates can widen bank interest margins, potentially dampening the stimulative effects of easing domestic policy and constraining credit growth. - Episodes of negative policy rate differentials (BoN repo below SARB) provide limited scope for domestic policy discretion to influence aggregate bank rates, but may affect rates at the margin; sustained differentials are difficult to reconcile with full capital mobility absent frictions. - Structural frictions (domestic asset requirements for NBFIs, prudential regulations, limits on foreign exposures, shallow secondary markets) and the large NBFI sector likely reduce asset substitutability with South African instruments and dampen capital mobility, thereby permitting some pass‑through deviations. - Further analysis using disaggregated interest rates (by loan type and funding source) is required to identify the drivers of widening interest margins and time‑varying pass‑through across deposit types. *Source: IMF staff estimations and analysis in "1. Understanding interest rate pass-through is important under a pegged exchange rate regime."* ### 19. Turning to deposit rates, the estimates suggest incomplete pass‑through. Following a change in ### 19. Turning to deposit rates, the estimates suggest incomplete pass‑through. Following a change in ### Deposit rate pass‑through - Following a change in the SARB policy rate, average deposit rates adjust gradually, reaching about 90 percent pass‑through after three months. - Pass‑through from domestic policy rate differentials is more muted, with smaller point estimates and shorter persistence. - Aggregate results highlight the dominant role of the anchor‑currency policy rate (SARB) in shaping system‑wide deposit interest rates, while domestic policy actions exert a more limited influence at the aggregate level. ### Asymmetry across lending and deposit rates - Pass‑through to lending rates is strong and complete, reflecting the established convention of variable‑rate loan contracts with lending rates linked to the prime rate. - Pass‑through to deposit rates is slower and incomplete. - This asymmetry implies: - Changes in policy rates affect borrowing costs more rapidly and more fully than deposit remuneration. - Bank interest rate margins are compressed during easing cycles, which may dampen the policy signal for easing lending conditions. - Margins are expanded during tightening cycles, dampening the signal for tightening credit conditions. ### Conclusions and policy implications - The SARB policy rate plays a dominant role; both lending and deposit rates are more responsive to changes in the SARB policy rate than to those in the BoN policy rate. - Deviations in the BoN repo rate influence average domestic interest rates through automatic repricing of variable‑rate loans, but their effects are weak and short‑lived. - Implications of limited scope for independent monetary policy under a pegged exchange rate with free capital flows and strong financial ties to the anchor country: - A persistent policy rate gap may create scope for arbitrage, as large corporates can shift borrowing or fund placement between Namibia and South Africa. - Keeping the policy rate below that of the SARB will have limited effects on stimulating lending because banks may be reluctant to lower lending rates given compressed interest rate margins, and lower domestic rates may create incentives for large corporates to move excess funds abroad. - Raising the policy rate above that of the SARB may have limited effectiveness in cooling domestic demand as large corporates can choose to borrow abroad and it could attract capital inflows. - Carefully calibrating the alignment of the BoN policy rate with the SARB rate could help reduce the bifurcated structure of bank funding and avoid distortions from rate misalignment. - Structural constraints beyond the monetary policy rate matter for credit developments, including: - Limited housing supply. - Scarcity of viable investment opportunities for business lending. - The monetary policy rate is not the right tool to address these structural issues. - Reforms to improve monetary transmission: - Effectively manage excess liquidity through systematic, predictable, and transparent absorption at rates aligned with the BoN policy rate. - Such reforms could help improve saving incentives and narrow interest rate margins. ### Cross‑study consistency and broader evidence - The asymmetric pass‑through is consistent with findings elsewhere (e.g., Messer and Niepmann, 2023 for the euro area). - Abundant banking liquidity in Namibia is noted as an explanatory factor for slow pass‑through to deposit rates. - Footnote: "This pattern is not unique to Namibia. Low elasticity and stickiness of retail deposit rates, combined with faster pass‑through to lending rates—particularly in systems dominated by variable‑rate loans—are well‑documented features of many banking systems, including the US (Berry et al. 2019) and the EU (Chen et al. 2024)." ### Data and measurement considerations - Aggregate lending and deposit rates may mask substantial heterogeneity in pricing dynamics across loan types, borrower segments, and funding sources. - When a large share of lending is at variable rates and new lending conditions differ from repricing of the existing loan stock, aggregate measures can be misleading. - More granular, loan‑level data would: - Allow clearer distinction between pass‑through at origination and pass‑through through automatic repricing. - Help identify which loan and deposit types are driving observed aggregate dynamics. *Source: sipea2026060* --- _Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2026/english/sipea2026060.pdf_