VAT hike may affect inflation and salary increases: Reserve Bank

As part of the annual budget speech, former finance minister Malusi Gigaba confirmed that there will be a rise in the effective VAT rate – from 14% to 15% – from 1 April 2018.

This, combined with other changes such as an increase in the fuel levy, has given rise to fears that the inflation rate and interest rates will both take a knock.

Speaking to Reuters on Tuesday (13 March), Brian Kahn, one of the Reserve Bank’s top policymakers said that the central bank expects the hike in 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.

“With inflation targeting, you try and look through exogenous shocks, particularly temporary ones and this is a one off,” Kahn told Reuters on the sidelines of investor meetings in London.

“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,” he said.

When the VAT hikes kick in, it is not only the shelf price of items which will be affected, but also prices all along the value chain.

The push back against the VAT hike has already started among workers, with Cosatu threatening to strike if the government does not add more items – particularly fuel and utilities – to the zero-VAT basket of goods.

The union is also fighting for better wage increases in the coming years, demanding a CPI + 3 percentage point hike for the next three years, with government offering CPI + 1.5.

Read: 4 major taxes that are going to hit you in the pocket from April 2018

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VAT hike may affect inflation and salary increases: Reserve Bank