Reserve Bank governor Lesetja Kganyago has sketched out a technically grounded but politically resonant logic for locking in a 3% inflation target, framing the shift as a pro-poor, pro-growth and fiscally prudent move that deserves formal institutional backing.
“If you want lower interest rates, you should have a lower inflation target. So this sort of sounds counterintuitive. But the point here is that there is no country that has low interest rates and high inflation. There isn’t,” Kganyago said in an interview with Business Day last week.
His comments come three months after the monetary policy committee (MPC) publicly modelled, discussed and operationalised a 3% target for future forecasts, effectively signalling a lasting preference for price stability at a lower level.
To grasp the power of persistent inflation, Kganyago invoked the “rule of 72”, which is used in investment and finance as a window into how inflation erodes real incomes over time or boosts them if one is on the right side of compounding. At 6% inflation, the purchasing power of cash halves in 12 years. At 3%, it takes 24.
“Even with low inflation, it does not mean that prices are static. They just rise at a lower pace,” Kganyago said. “In the advanced economies, like the US, the UK and so forth, they target an inflation rate of 2%. So the average price is only doubled once in 36 years, right? That’s why they have higher standards of living than us because their money is more stable than ours. And that is a very important conversation for us to have.”
Kganyago’s push takes the inflation targeting tool beyond macroeconomic stability to also using it as a lever for social equity and fiscal efficiency.
“The poor experience inflation differently,” he said. “When headline inflation was 7.8%, the lowest income deciles were facing closer to 9.8%. That’s because they spend more on food, transport and energy, the items that rise the fastest. They don’t have dividends or property income to cushion the blow.”
Stats SA weights the consumer price index (CPI) basket by average spending patterns. Higher-income households account for a bigger share of spending on items that rise less quickly, meaning the overall CPI can look lower than what poorer households actually pay. That explains why aggregate inflation can be 3% while low-income households face higher price pressures.
Kganyago also pointed to fiscal benefits. As Business Day reported in recent months, locking in a lower inflation anchor could save the government up to R900bn in debt-service costs over a decade, according to the Bank’s internal scenario work. Even conservative estimates, discounted by two-thirds, still imply annual savings equivalent to a two percentage point increase in VAT, or about R300bn.
“If we say the savings will only be R300bn, which is R30bn a year, it’s still a significant amount of money. What’s the magic of R30bn? R30bn is what you would have raised by increasing VAT by two percentage points. You can lower inflation, and suddenly you have R30bn that you didn’t have before, which you can spend on other things other than debt-service costs.”
Since peaking at more than 10% in July, the SA 10-year government bond yield has been steadily falling. As of Friday, it was quoted at 8.87%. The 1.13 percentage point drop implies roughly R60bn-R65bn a year in theoretical interest bill savings on the R5.5-trillion loan stock in the 2024/25 year.
But the move is not without trade-offs. Bank studies show a short-term growth cost of as much as 0.3% in the first year of anchoring inflation lower, followed by a rebound in year two and acceleration in year three.
If, however, expectations are slow to change or if the government-administered price hikes continue apace, the adjustment could be costlier. Private sector inflation would need to fall even more steeply to compensate for sticky public sector inflation, potentially depressing demand and employment — a scenario many in the trade union movement and segments of the Treasury fear.
Other studies, including one by Richard Kima, a research fellow at Unu-Wider, and Keagile Lesame, a Treasury economist, suggest lower inflation reduces the cost of capital and stimulates investment, offsetting the initial drag.
Still, the Treasury has the final word on targets. Although the Bank has modelled 3%, Treasury’s official stance remains that fiscal plans are built around a 4.5% inflation assumption, and a formal written agreement on a new target will be issued “as soon as is practical” to anchor expectations.
Kganyago confirmed that joint technical teams are working on a proposal, which will be presented to the Bank and finance minister Enoch Godongwana, who is due to deliver the medium-term budget policy statement later this month.
“My preference is that we should grab this opportunity,” Kganyago said.
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