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Rates and tax increases loom while weak rand to remain

Wednesday, 13 January 2016   (0 Comments)
Posted by: Author: eNCA
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Author: eNCA

Rising food prices and inflation, higher interest rates, and possible tax increases — these are the realities facing South Africans this year.

Investment Solutions chief economist Lesiba Mothata warns that the year will be characterised by higher interest rates, corporate taxes, a potential wealth tax, as well as increased fuel levies.

The Reserve Bank will likely change the magnitude of rate hikes this year from 25 basis points — the level effected twice last year — to 50 basis points "because the feed through from a depreciating currency is going to be more pronounced than what the Bank has priced in, particularly in the fourth quarter”, said Mr Mothata.

The Bank’s monetary policy committee will get started with its work at a meeting later this month.

Some economists are of the view that even if the Bank does not raise rates this month, it will have to do so this year to tame rising inflation.

The rand will loom large in the inflation outlook and the Reserve Bank’s rates decisions. More currency weakness could see inflation breach the 3 percent - 6 percent target band for longer than anticipated. The Bank currently sees inflation breaching the target in the first and fourth quarters of this year.

The increasing likelihood of a sovereign downgrade to junk status suggests that the rand would remain under pressure in the upcoming weeks, MMI Holdings economist Sanisha Packirisamy said.

The rand will also be moved by the pace at which the US Federal Reserve raises interest rates in that country after having raised them last month, for the first time in almost 10 years. Any dollar strength from future US Fed decisions would cause capital outflow from SA, causing rand weakness.

The opposite will lead to some strengthening in the rand.

However, the negative consequences of a weak rand go beyond just inflation. A weak rand makes imports more expensive.

If imports grow faster than exports, the trade deficit will widen. It will in turn cause a widening of the current account and cause further rand weakness.

The Bank is not only worried about a weak rand and its ability to stoke inflation, but it is also concerned that inflation expectations have risen.

The latter would see businesses raising their selling prices and workers demanding higher wages. All of this ultimately pushing up inflation, necessitating a rate hike.

The expected continuing weakness in the price of oil will count in SA’s favour on the inflation front. Oil is one of SA’s largest imports and so a lower oil price will help.

But one thing remains key: Government must continue sticking to spending ceilings and spending taxpayers’ money prudently.

Government has already taken several steps to close the large budget deficit. It has cut growth in spending and put in place spending ceilings, employed fewer people than it has in the past, and marginally raised personal income taxes.

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