Rise in VAT will drive inf lation rate higher

THOUGH the South African economy has been standing strong in recent months, the tide may be about to turn, and it could be attributed to the hike in VAT.

This is according to Rowan Walter of the South African Reserve Bank (SARB), who addressed the bank’s monetary policy forum at the Boardwalk Hotel yesterday.

Despite inflation falling to a seven-year low of 3.8% last month, Walter warned that the rise in value-added tax from 14% to 15% – which came into effect on April 1 – would push the inflation rate higher.

“Inflation has dropped below the midpoint of our target [of between 3% and 6%],” he said.

“[However], inflation is seen to pick up, partly due to VAT effects. There was a big change from January to March.

“If you exclude VAT, we would have seen the forecasts looking quite a bit better.”

The Reserve Bank’s monetary policy review indicated that the VAT increase could account for a 0.5-percentage-point increase in inflation.

“In the [short term] it is a bit worse, but [we predict it] coming down to 5.2% by 2020.”

SARB divisional head for macro-models Shaun de Jager said there was still good news.

“We recently lowered our interest rates from 6.75% to 6.5%, which is quite a welcome relief for many people,” De Jager said.

“It has been related to a lot of the good news we’ve had in South Africa since the ANC [party presidential] election last year.

“From a domestic growth perspective, we’ve seen the growth projections for last year being revised.

“We’ve also been revised out of a technical recession, as we had two consecutive quarters of negative growth in 2016 and 2017, but since StatsSA revised those figures we have only one quarter of negative growth.

“We’re certainly looking a lot better, but with [the growth] potential around 1.2% in the next few years, [we still don’t have the] strong impetus we need; we need to raise it to about 3%.”