It could take up to two years to implement a new inflation target, should it be announced as early as the end of 2025, Bank of America (BofA) global research says in its latest “SA viewpoint” note.
“We think moving to 3% is almost certain,” the BofA researchers said. “The [Reserve Bank] would not have intensified its desire if it did not have buy-in — at least in private if not publicly. Markets would not have reacted positively if the moves were in doubt.”
Bank governor Lesetja Kganyago has long argued that SA’s 3%-6% inflation band lags its emerging market peers, and the decision more than two decades ago to abandon plans to lower the range was a mistake.
With his term due to expire in 2029, and headline inflation having dipped below 3% — well under the 4.5% midpoint that guides the monetary policy committee (MPC) decision — Kganyago has stepped up his campaign for a lower target.
At the Bank’s MPC meeting in May, he presented a scenario with a 3% inflation target, which showed a lower interest rate path — falling below 6%, down from more than 7% in the baseline — and more stable inflation expectations, though at the cost of slower growth initially.
Kganyago noted that “the MPC is of the view that the 3% scenario is more attractive than the 4.5% baseline” and added that technical work on narrowing the range in consultation with the Treasury was at an advanced stage.
Against this backdrop, BofA noted that the announcement would be made soon.
“An announcement could be made with the concurrence of the finance minister at either of the upcoming MPC meeting(s) — the midterm budget presentation in October or the budget 2026 presentation in February,” BofA said.
According to the bank, the phase-in period could be two years, announced by the end of 2025, and the target reached by the end of 2027.
“We forecast inflation to be back above 4% by year end. As a result, the [Reserve Bank] would want to see CPI below 4% (3.5%-3.8%) by end-2026 to show that inflation is decelerating, then gradually fall to 3% by end-2027,” BofA said.
“Timing of reaching the 3% inflation target depends on supply-side movements, particularly for oil and food prices. Lower oil and food prices help to reach a 3% target within two years. In this case, we expect oil prices to average $67 in 2025 and $70 in 2026, both favourable to the inflation outlook.”
It does not foresee much near-term harm to economic output, “given there are already structural impediments to growth beyond monetary policy”.
In the short term, the Treasury could lose some tax revenues associated with higher inflation. “Nominal government revenues could increase at a slower pace due to lower nominal GDP growth. In the 2025 budget, the Treasury did not adjust tax brackets for inflation.” However, the medium- to long-term benefits outweigh short-term costs.
“Interest rates would come down, along with bond yields [or] borrowing costs, while private sector credit growth might increase, boosting GDP growth. Lower inflation and interest rates are good for lowering government debt service costs. If long-term GDP growth were indeed higher, then fiscal authorities could also benefit from higher revenues.”
The Bank’s own study showed that targeting lower inflation could yield nearly R900bn in debt-servicing savings over the next decade.
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