SA’s 3% inflation target sets sights on price stability and investor confidence

With the announcement of SA’s new inflation target of 3%, with a one percentage point tolerance band, the focus now turns to implementation, communication and the Reserve Bank’s monetary policy committee (MPC) meeting next week.

Announced in Wednesday’s medium-term budget policy statement (MTBPS), the move brings the target in line with that of key trading partners and marks the most significant policy shift in a quarter of a century, following months of uncertainty and institutional friction.

By committing to a lower and more credible inflation target, the government and Reserve Bank aim to entrench price stability, lower borrowing costs and boost investor confidence. A well-anchored target also supports a stronger rand, more stable wage bargaining and greater fiscal predictability.

“In the short to medium term, targeting lower inflation will result in lower nominal GDP, which in turn results in reduced revenue projections and a less favourable debt-to-GDP ratio,” finance minister Enoch Godongwana said in the MTBPS, but added that it would be counteracted by the reduction in debt service costs.

“The long-term benefits clearly outweigh these shorter-term concerns. Lower inflation will support higher levels of real economic growth.”

Crucially, it could also reduce inequality and create jobs, as poor households are most exposed to the erosion of purchasing power.

“Household spending and private investment will rise due mainly to higher disposable income and lower borrowing costs,” Godongwana said in the MTBPS.

Over time, a lower target will help suppress inflation and expectations, “creating the space for permanently lower interest rates, which will support household spending and investment — boosting economic growth and job creation”.

In a media briefing before the presentation of the budget statement, Bank governor Lesetja Kganyago explained the 1% tolerance band as a necessary buffer that would allow for temporary deviations from the 3% target without triggering an immediate policy response. He said the tolerance band provided the adaptability required for a flexible inflation targeting framework to function effectively.

“There’s no such thing as costless policy,” Kganyago said. “What is important is that the benefits outweigh the costs.”

Long time coming

The campaign for a lower inflation target has been gradually building since April 2017, when the Reserve Bank announced it would begin targeting the midpoint of the official 3–%6% band (4.5%).

By 2021, the Bank began arguing that even 4.5% was too high for an emerging market economy aiming to boost competitiveness and control wage-price dynamics.

Over the next four years, the campaign intensified. As inflation trended downwards (towards 3% or below), the Reserve Bank started with public advocacy, escalating its message through research, public statements and media engagements.

In July, the Bank took markets by surprise during its MPC briefing, when Kganyago announced that the Bank would now anchor policy at 3% — the bottom of the existing target range — effectively establishing a new de facto target without the Treasury’s formal approval.

Godongwana pushed back forcefully, accusing the Bank of “unilateral announcements that pre-empt legitimate policy deliberation.”

The visible rift between two key economic institutions rattled investors and raised concern about SA’s policy co-ordination and credibility. However, since then, market expectations have shifted rapidly. According to the Bureau for Economic Research, five-year inflation expectations have dropped to 4.2% — the lowest level on record.

On September 1, the Reserve Bank and Treasury issued a joint statement, defusing tension and confirming that both institutions were working together.

When asked on Wednesday whether he felt vindicated, Kganyago said: “It’s not my target; it’s the country’s target…. There’s only one winner here today: it’s the South Africans who are now going to enjoy a low-inflation economy.”

In the lead-up to the MTBPS, the Reserve Bank used its October Monetary Policy Review to make its strongest argument yet for the new anchor, showing core inflation volatility had fallen sharply. Behavioural models show pricing is now more forward-looking, forecasts show inflation trending to 3.3% in 2025/26 and to 3% by 2027, and stress tests indicate the new target can hold even under global or commodity price shocks.

In one scenario, the Bank found that the 3% anchor would allow for up to five more rate cuts over the next two years, bringing the repo rate closer to 6%, as opposed to the 7% endpoint indicated by the 4.5% scenario.

“The main risks that could push inflation higher are geopolitical tensions and exchange rate volatility — which could raise the price of imports — and lingering risks from elevated administered prices and animal disease outbreaks, the Treasury noted in the MTBPS. “In contrast, strong agricultural output and a stronger rand exchange rate would reduce food and import prices.”