South Africa’s central bank expects a hike in value added tax (VAT) to lift inflation by around 0.6 percentage points over the coming year though it doesn’t expect to raise interest rates in response, one of its top policymakers said on Tuesday.
South Africa announced plans to raise VAT for the first time in 25 years last month in its first budget under new President Cyril Ramaphosa.
It is part of efforts to stabilise the country’s debt and repair its economy after nine years of mismanagement under the scandal-plagued, former President Jacob Zuma.
“With inflation targeting, you try and look through exogenous shocks, particularly temporary ones and this is a one off,” Brian Kahn told Reuters on the sidelines of investor meetings in London.
Latest data showed that headline consumer inflation slowed to 4.4% year-on-year in January from 4.7% in December. On a month-on-month basis, inflation eased to 0.3% in January from 0.5% in December.
The move to raise VAT to 15% from 14% starting in April is expected to generate an additional R23 billion of revenue in 2018/19, but is also a politically risky step ahead of elections next year.
South Africa’s powerful trade union movement and consumer groups have been vocal critics of the increase and are demanding an interest rate cut to ease the pain.
Kahn said policy makers at the bank would not be “too concerned” about the tax hike pushing up inflation by 0.6 percentage points, with those first round effects filtering out of the data after a year.
“There may be a few second round effects, it may affect wage increases in the following years, so we expect a moderate, very small increase in the following year as a result of that.”
“But it is something that we would not react to by raising rates and we would certainly try and look through it.”