South Africa's inflation target under review: Weighing risks and rewards for stability

Daily Maverick

13 hours ago

Should South Africa lower its inflation target? Does inflation targeting work? And if so, what should the target be? After surviving yet another week of political turbulence and internecine bickering, South Africa's increasingly rickety coalition government might be about to face yet another thorny dilemma: the South African Reserve Bank's (SARB) push to lower the country's inflation target to below 3%, from the current band of 3-6%.
Speaking on Monday, 30 June 2025, Reserve Bank Governor Lesetja Kganyago reiterated his argument for a lower inflation target, saying that the current rate undermined the value of the rand and contributed to persistent price increases. The SARB, along with the National Treasury, is 'almost done' completing a technical review of the inflation targeting framework and plans to submit recommendations to Kganyago and Finance Minister Enoch Godongwana shortly.
'Although an inflation rate of 4.5% may seem moderate, it still causes prices to double every 16 years,' Kganyago noted in the SARB's annual report. 'This is hard to reconcile with our constitutional obligation to safeguard the value of the currency.
'The main concern with South African inflation is not our ability to hit the target,' Kganyago said. 'Rather, it is that our target is high compared to other countries. For this reason, despite our success in stabilising inflation, the price level is almost 20% higher than it was in 2021.'
The central bank currently aims to anchor inflation expectations at the midpoint of its 3-6% target, but this range is now under formal review. With May's inflation reading at 2.8%, Kganyago and his colleagues see an opportunity to lock in gains and update a framework that has remained unchanged since its introduction in 2000.
'Perfect opening for reform'
David Fowkes, a member of the Monetary Policy Committee, recently called this moment 'amazing', suggesting that current low inflation levels provided the perfect opening for reform as they would minimise any potential transition costs, which might come in the form of momentarily higher interest rates. According to the bank's modelling, shifting to a 3% target would yield significant benefits, with inflation expectations declining quickly while 'borrowing costs would fall more significantly' compared with the SARB's baseline forecast.
Behind the push is a clear driver: investor appetite. Global asset managers have been pressuring the government to support the SARB's plan in the hopes that a lower target would permanently reduce bond yields and lending rates. South African bonds and the rand have both strengthened recently, with South African borrowing costs at a three-year low, partly on expectations and hopes that the Treasury will approve the new target by early next year. According to insiders, hedge funds and portfolio managers are actively lobbying the Treasury, advising a cautious transition to manage market impact and the inevitable political fallout.
And there is some merit in the proposal. South Africa's base interest rate keeps the prime lending rate near 11%, with 10-year bond yields around 10%. These rates are at least partly elevated because of the high upper bound of the inflation target. It is for this reason that other emerging economies, like Brazil, have already lowered their targets — from 4.5% to 3% — with a 1.5% tolerance range. It is clear that international investors would like to see an emerging market like South Africa fit into what they see as global monetary policy best practice.
Yet despite these compelling arguments, there are three issues with changing it that the SARB is either missing or conveniently ignoring. First, it is politically toxic. Lowering the inflation target would be further ammunition for the ANC-led government to suppress wage growth in the public sector and restrain price hikes by state-owned enterprises and municipalities.
Public sector unions, which of course dominate all critical wage negotiations, rely heavily on past inflation data and expectations — which are largely driven by the inflation target — to argue for increases. There have even been recent calls from the academic community on why South Africa should actually be looking at raising the target threshold, not lowering it. The factions of the ANC who are not aligned with the Treasury, which has consistently been viewed as 'neoliberal', will be spoiling for a fight.
Second, moderate inflation is one of the few tools available for reducing public debt. For an emerging market with high debt-to-GDP like South Africa, a bit of inflation is critical to 'inflate away' liabilities. A lower target would negate this effect, making debt consolidation even harder and potentially putting more pressure on the Treasury to cut spending at a time when the economy needs all the stimulus it can get. This could, theoretically, have adverse consequences for growth.
Importance overstated
Finally, the long-term importance of the inflation target is overstated. While financial markets might care about the level of the target, its long-term effect on economic fundamentals is minimal. The actual target itself is essentially random. The first economists who devised inflation targeting in New Zealand in the 1980s knew this — it is essentially a pragmatic and political decision as to what you make the target, not an economic one. What matters more is whether inflation expectations are well anchored and consistent, and then of course whether wages rise in tandem with prices.
On that latter point, South Africa has clearly fallen short. Wage growth, especially outside the public sector, has consistently lagged inflation since the global financial crisis. The gap widened sharply during the Zuma-era stagnation and the Covid-19 pandemic. Rising food and transport costs, load shedding-related expenses and record-high unemployment have meant that even with inflation near historic lows most South Africans feel worse off than ever.
For this reason, the debate is a red herring. The SARB should quit listening to the demands of the investor community and rather stick to its job of keeping prices in line with expectations. If the economy was being properly managed by the government and creating private sector jobs — which would mean more people being paid a decent salary — then we would not be having this debate in the first place. DM