As the worst of the tariff-driven fears abated over the first half to the end of 2025, a widespread expectation took hold that monetary policy would be eased further as several Central Banks embarked on a cautious cycle of rate cuts. In the second half to June 2026, most Central Banks went into a holding pattern and then the war in the Middle East and its concomitant oil shock prompted several to hike.
This represented a clear pivot between the two halves. The global real economy continued to display resilience in key centres but was buffeted by renewed volatility in energy markets, the lagged effects of earlier policy tightening, and ongoing trade and geopolitical frictions. However, in the wake of the pivot, growth expectations have been shaved back from around 3.5% to 3.0% for 2026. The United States economy has proven more durable than many anticipated, supported by fiscal impulses and a tight labour market. Growth in China remains subdued amid structural challenges, while Europe continues to grapple with its own headwinds.
Inflation has turned into a headache for the Federal Reserve (see chart). Nevertheless, the Federal Open Market Committee has maintained a steady approach, keeping the policy rate within a restrictive range longer than previously expected. Geopolitical tensions, particularly developments in the Middle East, have contributed to periodic spikes in energy prices, adding to the inflation impulse observed across many economies.
Commodity markets were mixed. Oil, gold and silver prices have surged to eye-watering levels, but have recently plummeted again. Copper has maintained firm levels, which augurs well for Namibia's copper prospects. The diamond market, however, has continued to face structural challenges, with prices and demand remaining weak due to competition from lab-grown stones and softer consumer spending in major markets. This has had pronounced and ongoing effects on Botswana's economy.
Our group operates in three jurisdictions with distinct exchange rate regimes that impact monetary policy greatly:
- Namibia maintains a fixed exchange rate regime to ZAR. This is the main aim, but financial stability and inflation considerations play important roles. As Governor Ebson Uanguta noted in the recent Monetary Policy Statement, safeguarding the peg and anchoring inflation expectations remain central to the Bank's mandate in the current environment.
- Botswana maintains a crawling peg policy. It aims at exchange rate stability while allowing flexibility in setting targets. It also has an official inflation target band of 3% to 6% with a midpoint of 4.5%.
- South Africa maintains a free float exchange rate regime, but with some capital controls, combined with an inflation targeting framework. The band was recently lowered and tightened to 2% to 4%, with a 3.0% midpoint as the official target.
Namibia's economic growth momentum, which had been relatively firm in the preceding periods, slowed noticeably as the mining sector faced headwinds and inflationary pressures emerged in the latter part of the financial year due to the fuel price shocks. In Namibia, real GDP growth is estimated to have moderated to approximately 1.6% for the financial year, down from the stronger rates recorded in 2024 and 2025. The mining and quarrying sector experienced contractions in diamond and certain base-metal outputs, weighing on primary-sector performance. Agricultural output has shown tentative signs of recovery following the previous drought, although the sector remains vulnerable. In contrast, the tertiary sector has provided important support, with wholesale and retail trade, information and communication, and financial services registering positive contributions. Construction activity has also been relatively firm in places, linked to ongoing project development.
Inflation, which had been relatively contained earlier in the period, rose to 4.4% year-on-year by June 2026, the highest reading in over a year. The increase was driven predominantly by transport costs associated with higher fuel prices. In response, the Monetary Policy Committee of the Bank of Namibia raised the repo rate by 25 basis points to 6.75% in June 2026. The decision was taken to anchor inflation expectations, mitigate second-round effects, and safeguard the peg.Private sector credit demand has remained subdued, consistent with the moderation in economic activity and higher borrowing costs in certain segments. The banking sector continues to maintain strong capital and liquidity buffers, with a notable portion of assets held in government securities. Non-performing loans have remained manageable, although close monitoring is warranted given the economic slowdown.
On the fiscal front, revenues have come under pressure from weaker performance in the mining sector and, at times, lower Southern African Customs Union receipts. Nevertheless, the debt-to-GDP ratio remains on a broadly manageable trajectory, and authorities have maintained a commitment to fiscal discipline. Borrowing requirements have been met through a combination of domestic issuance and external sources. The successful execution of infrastructure and energy projects will be critical to supporting both near-term activity and longer-term fiscal sustainability.
Botswana's economy has continued to face significant headwinds from the prolonged weakness in the global diamond market. GDP is estimated to have contracted again in calendar 2025, with only a modest recovery expected in 2026. The fiscal position has deteriorated materially, with the deficit widening and public debt rising as a share of GDP. Foreign exchange reserves have declined, and liquidity conditions in the banking system have been strained. The Bank of Botswana has hiked its Monetary Policy Rate steeply from 1.90% seven months ago to 5.50%, although the transmission mechanism has been complicated by liquidity dynamics and the need to manage exchange rate pressures.
In South Africa, the economy recorded modest growth of around 1.3% in 2025, with a similar or slightly lower pace expected for 2026. The Government of National Unity has provided a measure of political stability and begun delivering incremental progress on energy and logistics reforms. However, structural constraints continue to limit faster growth, and consumer and business confidence remains low and has weakened once more.
Inflationary impacts from oil and fuel, combined with second-round risks, moved the South African Reserve Bank to lift rates in May. The new inflation-targeting framework, with its focus on a three percentage-point target, will have important implications for monetary policy coordination across the Common Monetary Area.
Looking ahead, Namibia's medium-term prospects remain positive, anchored by ongoing and prospective investments in the mining, energy, and green hydrogen sectors. The successful implementation of these projects, alongside continued agricultural recovery and broader diversification efforts, could lift potential growth above current rates. Risks include further weakness in commodity prices, escalation of geopolitical tensions, adverse weather conditions, and a slower-than-expected global growth environment. On the policy front, the recent rate hike by the Bank of Namibia underscores the primacy of maintaining price stability and currency credibility. A return to a more accommodative stance will depend on inflation moderating sustainably and global conditions permitting.
For the region, the importance of structural reforms, fiscal prudence, and concerted efforts to diversify economies away from excessive reliance on single commodities cannot be overstated. The current environment serves as a timely reminder that while external conditions matter greatly for small open economies, domestic policy choices and implementation capacity remain decisive in shaping outcomes.
Floris Bergh
Chief Economist
Capricorn Asset Management
