tom alweendo : the exchange rate speech by mr tom alweendo, governor of the bank of namibia, during a breakfast meeting of the namibia economic society, windhoek, 17 august 2004. * * * i have been asked to talk to you this morning about ‘ the exchange rate ’ and against my better judgment i agreed to do so. specifically, the question everyone is asking is whether it is not high time that the monetary authorities do something to depreciate the exchange rate through monetary policy operations. at the center of the argument for action to depreciate the exchange rate is the negative effect a high exchange rate has on the export sectors of the real sectors. at the risk of stating the obvious, let ’ s all establish and agreement that an exchange rate is a price of one currency in terms of another currency. therefore, like other prices, exchange rates are determined by the interaction of supply and demand. this interaction will sometimes results into a depreciation or appreciation of a currency. intervening in this process is in itself an interference with the free market concept, where the market is supposed to be efficient, guided by an invisible hand. i am, however, happy that there are now a number of market players who understand that the market is not always perfect and that there is sometimes a justifiable need to intervene in order to correct the market. in order for us to appreciate the exchange rate today, let us look at the movement in the exchange rate over the last fourteen years. in 1990, the average nad / us $ exchange rate was nad2. 59 and the average inflation was about 15 %. by 2000 the exchange rate has depreciated by more than 100 % to nad6. 87. in 2002 the exchange rate reached a record low of nad10. 52. during 2003 the exchange rate started to appreciate and most people were not expecting an appreciation, but were expecting depreciation. because of this mismatch in expectation and what transpired, the effect of the appreciating exchange rate is made to sound much worse than it really is. those who argue that the monetary authority should do something to depreciate the currency, suggest two methods. firstly they say that the central bank should reduce interest rate and secondly the central bank could buy us $. with the first method, the local currency will become less attractive and there will be less funds flowing into the local economy and hopefully this will translate into a weaker exchange rate. this

further out. the mortgage interest rate is projected to decline to just above 4 percent. even though there is substantial uncertainty about the future level of the neutral rate of interest, we must be prepared for a higher interest rate level than we had been accustomed to over the past decade. 2 / 3 bis - central bankers'speeches chart : inflation will slow and unemployment will increase somewhat given the current policy rate path, we expect inflation to slow further and approach 2 percent towards the end of 2027. growth in the norwegian economy is expected to pick up slightly in the years ahead, but we expect some increase in unemployment. the decline in some business sectors, especially the construction industry, may continue for a while longer before conditions turn around. many consumers have less money to spend, which has made it difficult for some people to make ends meet. interest expenses are set to remain high, but wages are expected to rise faster than prices. most households will then see their spending power increase and a debt burden that will be easier to bear. the economy may move on a different path than we now envisage, and the policy rate path may then also change. the policy rate is now likely sufficiently high to bring inflation back to target within a reasonable time horizon. but we cannot say this with certainty. if capacity utilisation increases or the krone depreciates, wage and price inflation could remain elevated for longer. in that case, there may be a need to raise the policy rate. on the other hand, if unemployment rises more than expected or price inflation declines more rapidly, the policy rate may be lowered earlier than we now envisage. inflation has come down. this is good news. but we must keep in mind that the last mile of disinflation may take time. to maintain confidence in the inflation target, we must do our job and bring inflation back to the 2 percent target. we will then be able to reap the benefits of our efforts. 3 / 3 bis - central bankers'speeches