Reserve Bank now using ‘unofficial’ 3% inflation target

Reserve Bank Governor Lesetja Kganyago said the Monetary Policy Committee (MPC) will now aim for inflation expectations to settle at the bottom of its target range, 3%.

Kganyago made this announcement at the MPC meeting on Thursday, 31 July 2025, which also saw the committee announce a 25 basis point interest rate cut.

This comes as the central bank and the National Treasury are still in talks to officially shift the current target range of 3% to 6% to a lower, narrower target.

The National Treasury sets the inflation target that the Reserve Bank must achieve. Since 2000, this target has been a range of 3% to 6%.

When asked if the MPC’s decision is an official adoption of a lower target, Kganyago explained that this is merely the committee’s preference.

Prior to this announcement, the MPC preferred for inflation to be anchored around the mid-point of its target range, 4.5%.

Kganyago explained that, when the MPC first said it would prefer for inflation to be anchored at 4.5%, inflation became less volatile and inflation expectations converged to the more explicit target.

Similarly, he said the MPC would now prefer for inflation to settle at the bottom of its target range, 3%. In other words, the committee is looking to use its credibility in targeting inflation to anchor expectations around a lower explicit target.

“We welcome the recent moderation in inflation expectations and would like to see expectations fall further,” Kganyago said. 

“This would expand policy space and make our framework more robust to shocks. We will use forecasts with a 3% inflation anchor at future meetings.” 

“The South African Reserve Bank will also continue working with the National Treasury to complete target reform and achieve permanently low inflation.”

Kganyago added that, over the past few months, the prospect of a lower inflation target has bolstered the rand and lowered long-term borrowing costs. 

He said it is important to sustain this progress and minimise uncertainty about monetary policy’s longer-term objectives.

“The challenges of the global environment highlight the urgency of domestic reform for accelerating growth,” he said. 

“The SARB’s main contribution is to deliver price stability. We have an opportunity now to lock in low inflation and clear the way for sustainably lower interest rates.” 

“Additional measures that would improve economic conditions include reaching a prudent public debt level, strengthening network industries, lowering administered price inflation, and keeping real wage growth in line with productivity gains.”

Why the SARB is pushing for a lower target

The Reserve Bank has been a staunch proponent of lowering South Africa’s inflation target, saying it could bring immense benefits to the country.

This includes faster economic growth, lower debt-servicing costs, and reduced cost-of-living pressures.

However, implementing it could result in interest rates remaining elevated for a longer period to ‘lock in’ lower inflation and maintain the Reserve Bank’s credibility.

This impact could be minimised if South Africa takes the opportunity to lower its target from a 3% to 6% range to a 3% target point while inflation is not rising, which is why the Reserve Bank is pushing to lower the target sooner rather than later.

In the announcement on Thursday, Kganyago explained that, with South Africa’s inflation hitting 3% in June, the MPC wanted to highlight the opportunity to achieve permanently lower inflation at minimal cost.

He explained that, with a 3% objective, core inflation stays roughly where it is currently, close to 3%. 

In this scenario, expectations would settle around a ‘new normal’ of 3% during 2027, as stakeholders observe lower inflation and learn about the new target. 

He said inflation also benefits from a somewhat stronger rand in this scenario. 

However, with an alternative forecast using the current 4.5% objective, there is no learning, and the exchange rate is more depreciated, so inflation reverts to 4.5% instead.

“For policy, as we showed last time, lower inflation allows for lower interest rates,” the governor said. 

“In our Quarterly Projection Model, for a 4.5% objective, rates bottom out around 7%. By contrast, the forecast for a 3% objective has roughly five more cuts, over the medium term, taking interest rates slightly below 6%.” 

“The logic of the model is that interest rates need to fall as inflation eases, to prevent the inflation-adjusted rate, or real interest rate, from rising too much.” 

Nonetheless, he warned that real rates would be temporarily higher for a 3% objective, and that there would be a modest growth sacrifice, which would help anchor expectations at lower levels.