An official of the South Africa’s central bank has said that he does not expect a raise in interest rates, in response to the increase in the value added tax (VAT).
Brian Kahn told Reuters on the sidelines of investor meetings on Tuesday in London that he expected the increase would lift inflation by around 0.6 percentage points over the coming year.
“With inflation targeting, you try and look through exogenous shocks, particularly temporary ones and this is a one-off.
“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,” Kahn said.
South Africa in February raised its value added tax (VAT) for the first time in 25 years.
The Finance Ministry said that VAT would increase to 15 per cent from 14 per cent, effective April 1.
VAT had remained unchanged since 1993.
“This is a tough, but hopeful budget. We decided that increasing VAT was unavoidable if we are to maintain the integrity of our public finances,” the ministry said.
A VAT hike ran the risk of adding a heavy financial burden on the poor, but the ministry said poor households would be cushioned through a zero-rating of basic food items such as maize meal and beans.