South African homeowners can get R30 billion boost

South African homeowners whose homes are mortgaged could see a windfall of about R30 billion if the Reserve Bank and National Treasury agree to lower the country’s inflation target.

A lower and narrower inflation target for South Africa would lead to lower inflation and, consequently, lower interest rates over the long term.

In addition, these effects will give South Africa’s economy a much needed boost, promoting stronger economic growth over the long term, despite a short-term growth hit.

This is according to Allan Gray investment analyst Sandy McGregor, who recently explained why the Reserve Bank believes South Africa should take advantage of the current low levels of inflation to lower the target.

The Reserve Bank has used inflation targeting as its preferred approach to monetary policy since 2000, with the target range set at 3% to 6%. 

South Africa has kept this target ever since, but in recent years, the Reserve Bank has started to advocate for lowering and narrowing the target to around 3%.

The National Treasury is in charge of setting the target and has been in discussion with the Reserve Bank to decide whether to lower and narrow the current target. These talks are still ongoing, with no official change announced yet.

McGregor described inflation as a “stealth tax” that disproportionately burdens the poor. 

“Those with wealth can protect themselves against its harmful consequences because they have assets whose value appreciates with inflation, but those without assets have no similar protection,” he explained.

Lowering South Africa’s inflation target would address this by leading to lower inflation in the long-term. This would, in turn, also lead to lower interest rates.

McGregor explained that, as inflation falls, so does the appropriate real rate. In South Africa, inflation at 4.5% requires a real rate of about 2.5%, giving a nominal rate of 7%. 

As inflation declines, the real rate required to promote price stability also declines. Therefore, with inflation at 3%, this rate would be about 2%, which implies the nominal rate should be 5%, 2% lower than when the target was 4.5%. 

McGrefor said there will be many beneficiaries of permanently lower rates, as a 2% cut in mortgage rates would constitute a windfall of about R30 billion annually to those whose homes are mortgaged.

“The affordability of house purchases would improve. Lower rates could resurrect the moribund property market outside the Western Cape,” he said. 

“The government has already benefited from lower bond yields. Business would be incentivised to borrow more for investment. Lower interest rates would promote stronger economic growth.”

The graph below shows South Africa’s inflation and interest rates since May 2021.

Arguments against lowering the target

McGregor also outlined the arguments critics of a lower inflation target have made and why some of their concerns may be misplaced.

“Within financial markets, sceptics question whether current levels of inflation can persist,” he said. The Reserve Bank expects that, in the last quarter of 2025, inflation will accelerate to an annualised rate of 3.9%. 

“The problem may be that the sudden advent of 3% inflation has taken many, including the SARB, by surprise,” he said. 

However, he said experience elsewhere has shown that once inflation declines to a substantially lower level, it tends to stay there, because the decline is the outcome of improving efficiencies, many of which will be permanent. 

In addition, South Africa’s open economy means it is significantly influenced by what happens elsewhere. Therefore, countries like China exports deflation to the rest of the world. 

“The Organisation of the Petroleum Exporting Countries (OPEC) has concluded that it lacks the power to sustain high oil prices by curtailing production, and its interests are best served by producing more oil at lower prices,” McGregor added.

South Africa’s current account is also reasonably balanced, which promotes rand stability and creates an environment that would support low inflation.

Another critique of a 3% target is that it would force the Reserve Bank to keep interest rates artificially high, which will damage the economy. 

However, McGregor said that, given that inflation is already at 3%, draconian changes to the path of interest rates are unnecessary. 

“Inflation is the outcome of a diverse mix of economic processes of which monetary policy is only one,” he explained. 

“The South African economy is changing in ways which promote greater price stability. Rates have already been calibrated to achieve the 4.5% target.” 

“A lower target does not require higher rates. It provides the opportunity for lower rates.”