Reserve Bank is South Africa’s saving grace

The South African Reserve Bank has successfully managed inflation in South Africa over the past 15 years despite a significant weakening in the rand’s value and deteriorating state finances. 

It has managed this so effectively that it is pushing for the National Treasury to lower the country’s inflation target to 3%, which promises to bring significant long-term benefits to South Africa. 

Old Mutual’s chief economist, Johann Els, recently explained that now is the ideal time to lower the inflation target, given the country’s subdued pricing pressures. 

Els said he is already factoring in a lower inflation target in his forecasts, as he expects a new target to be announced in the second half of 2025. 

Speaking at Old Mutual’s mid-year economic update, Els said inflation targeting in South Africa has been immensely effective. 

Prior to the implementation of inflation targeting in 2000, South Africa’s inflation whipsawed significantly due to a limited ability to manage economic and financial crises. 

However, since then, inflation has been relatively well contained within the 3% to 6% target range set by the National Treasury for the Reserve Bank, despite a sharp uptick during the Great Financial Crisis. 

One of the major threats to this has been the steady weakening of the rand since 2010, when the government’s finances began to deteriorate and economic growth slowed. 

The currency went from trading at just over R5 to the US dollar in 2006 to crossing R16 a decade later, after the country was downgraded to junk investment status. 

As the state’s finances continued to deteriorate, with spending ramping up and economic growth slowing, the rand continued to weaken. 

The currency has flirted with R20 to the US dollar several times since 2020, being saved by a commodity boom and renewed optimism following the formation of the Government of National Unity (GNU) in 2024. 

The rapid weakening of a currency typically results in elevated inflation as it dramatically increases the cost of importing goods and services. 

However, despite the rand’s weakness, Els said the Reserve Bank has managed inflation extremely well over the past 15 years. 

It has managed to keep headline inflation well anchored around its target range of 3% to 6%, with it bringing the rate down to 3% for most of 2025 so far. 

This can be seen in the graph below, courtesy of Els and Old Mutual. 

South Africa’s saving grace

Els’ praise is similar to that of S&P Global Ratings, which has said the Reserve Bank is one of the main reasons why South Africa has not seen its credit rating deteriorate deeper into junk status. 

South Africa’s credit ratings have undergone a decades-long slide from international sweetheart in the mid-2000s to junk status in 2016. 

A key factor behind this decline has been the poor performance of South Africa’s economy, with growth largely stagnating in the past decade. 

The country’s economic growth challenges are largely reflected in the looming financial crisis, as the government’s debt-to-GDP ratio keeps rising and has crossed 75% of GDP. 

However, if its financial institutions had lost credibility in the eyes of investors, things could have been worse for the country. 

In particular, the Reserve Bank has been highlighted for its dedication to maintaining its independence, prudent monetary policy, and tight regulation of South Africa’s financial sector.

“As in the past, the credibility of the South African Reserve Bank, the rand, and the depth of domestic capital markets all continue to underlie our ‘BB-‘ long-term foreign currency rating on South Africa,” the agency said. 

There have been consistent calls from some political parties to nationalise the Reserve Bank or at least change its mandate to stimulate the local economy. 

Such changes would severely impact investor confidence in South Africa and result in foreigners losing trust in the rand. 

S&P said South Africa remains unique among emerging markets in its ability to issue debt in its local currency and thus avoid the dangers of foreign exchange fluctuations threatening a government’s financial standing. 

This is almost entirely down to the Reserve Bank and its protection of the value of the rand through prudent monetary policy and its fierce independence. 

In many ways, the bank, alongside the National Treasury, has been South Africa’s saving grace in the past decade by resisting state capture and maintaining the credibility of the country’s financial system.