Higher taxes give Reserve Bank room to pause
THE FIRST income tax increase in 20 years is giving the SA Reserve Bank scope to hold off raising interest rates, even as rebounding fuel costs threaten to send inflation higher.
While investor inflation expectations are close to the highest level in almost two months, derivatives used for speculating on borrowing costs do not signal a full 25 basis point increase until October, according to data.
SA Reserve Bank deputy governor Daniel Mminele said on March 3 there was “some room to pause” on rate normalisation.
Higher income taxes announced by Finance Minister Nhlanhla Nene on February 25 are easing pressure on policymakers because they could result in less disposable income for consumers. That might offset the effect of the increase in the price of oil since January and levies on petrol and diesel, which Macquarie Group said could add as much as 1 percentage point to the inflation rate by next month.
No pressure
“The fact that fiscal policy was adjusted in such a way that it will exert pressure on the consumer in coming months perhaps provides the Reserve Bank with more room to refrain from hiking interest rates,” Jana van Deventer, an economist at ETM Analytics, said last week. “There is essentially no pressure on the central bank to raise rates from the demand side.”
Power blackouts are stifling production in the economy, which is already struggling to recover from strikes last year that shut factories and crippled platinum mines. Growth of 1.5 percent in 2014 was the slowest expansion since the recession of 2009.
While inflation slowed to 4.4% in January, the reprieve may be short-lived after petrol costs climbed.
The electricity shortage may hamper output for the next few years, Mminele said in Pretoria. The Reserve Bank has kept the benchmark rate unchanged since raising it to 5.75 percent in July. The next interest rate decision is on March 26.
The rand has weakened about 3 percent against the dollar since Nene’s Budget speech, adding to price pressures by boosting import costs. Crude’s 30 percent increase since reaching an almost sixyear low on January 13 and a 7.1 percent jump in pump prices from higher fuel levies, will push up inflation. The rand was bid at R12.0555 to the dollar at 5pm in Johannesburg on Friday, 30c weaker than Thursday’s bid.
Investors had priced in more monetary policy tightening after Nene’s announcement of higher fuel levies added to pressure on inflation, Matthew Sharratt, an economist at Bank of America Merrill Lynch, said last week.
While inflation slowed to 4.4 percent in January, the reprieve may be short-lived after petrol costs climbed 9.3 percent in March.
Stimulate economy
Forward-rate agreements starting in seven months, used to speculate on interest rates, are pricing in 28 basis points of rate increases over the period compared with 20 basis points on February 25.
Yields on government rand bonds due December 2026 have risen 18 basis points to 7.74 percent since the Budget speech.
Fiscal policy was often seen as the tool to stimulate the economy, and monetary policy was used to put a brake on demand, Lullu Krugel, an economist at KPMG, said last week. “We are now seeing the opposite of what we are used to.” – Bloomberg