One thing threatening South Africa’s inflation target change

Changing South Africa’s inflation target could lead to a range of macroeconomic benefits for the country, but administered prices may hinder the benefits from being felt.

Citadel Global director Bianca Botes explained that shifting to a lower, more precise inflation target, such as a 3% headline inflation rate, could bring about various macroeconomic benefits.

The conversation around South Africa’s inflation target has taken on new urgency, as the Reserve Bank recently hinted at its talks with the National Treasury having reached an advanced stage.

Since 2000, South Africa has had an inflation target range of 3% to 6%, which is relatively high and wide compared to its emerging market peers.

Botes explained that South Africa’s inflation-targeting framework has been a cornerstone of monetary policy for over two decades. 

“While it has helped to anchor inflation expectations and improve macroeconomic stability, the current target is now considered an outlier,” she said. 

“Many emerging markets have adopted lower targets, typically around 3%, and have shifted from ranges to point targets.”

“South Africa’s higher and wider target has contributed to persistently elevated inflation expectations, higher borrowing costs, and a loss of competitiveness relative to trading partners.”

Botes said shifting to a lower, more precise target could reduce inflation and borrowing costs, improve policy transmission, and strengthen economic growth. 

In addition, a lower inflation target would help to align South Africa with global best practice and reduce uncertainty for businesses and households.

She said lower inflation would support job creation, protect the purchasing power of lower-income households, and reduce inequality as inflation tends to hit the poor hardest.

Botes explained that it is important to note that lowering the inflation target is not simply a matter of announcing a new number. 

“It requires a shift in expectations across the economy. When the central bank signals a credible commitment to a 3% target, inflation expectations begin to adjust downward,” she explained. 

“This, in turn, influences wage and price-setting behaviour, leading to lower actual inflation and, over time, lower nominal interest rates.” 

Botes warned that the transition period is not without risks. For example, in the short run, a tighter monetary policy could temporarily slow economic activity as real interest rates rise. 

However, she said recent experience suggests that these costs are likely to be modest and short-lived, especially if the central bank maintains clear communication and credibility. 

For example, in 2017, the South African Reserve Bank (SARB) began targeting the midpoint of the current range, 4.5%. 

When this happened, inflation expectations adjusted quickly, and the economy saw little disruption.

However, Botes warned that the transition must be carefully managed to avoid unintended consequences for investment and employment.

Risks to the target change

Botes said the transition must be managed carefully, mainly by the Reserve Bank. 

“While a lower inflation target can enhance price stability and support economic growth, it could also lead to more cautious interest rate policies and, if not handled properly, dampen infrastructure investment,” she warned.

“The key is to balance inflation control with growth and investment needs, ensuring that unintended consequences do not offset the benefits of lower inflation.”

Therefore, the success of a lower inflation target will depend on clear communication and strong policy credibility. 

“The SARB must signal its intentions clearly and build public understanding of the benefits of the new target,” she said. 

She explained that maintaining central bank credibility is crucial. This is because when the public trusts that the central bank will deliver on its promises, inflation expectations adjust more quickly. 

“South Africa has already made progress in this regard, as the SARB’s credibility has improved over the years,” she said.

However, this onus is not only on the SARB, as fiscal policy should also play a supporting role, with measures to control public spending and align wage and price-setting practices with the new target.

 In addition, Botes noted that administered prices, such as those for electricity, water, and transport, are a particular challenge. 

She explained that the government or regulators often set these prices and can be slow to adjust to changes in inflation. 

These prices are often increased above inflation and play a significant role in South Africa’s inflation rate.

This is because they relate to services such as electricity and water, which are essential inputs in the economy. Thus, when the price for these services rises, the entire cost base of the economy rises, too.

Botes said reforms to make these prices more responsive to macroeconomic conditions would help to ensure that the benefits of lower inflation are felt across the economy.

The graph below, courtesy of the SARB’s March 2025 Quarterly Bulletin, shows how administered prices have changed since 2020.