The conversation around South Africa’s inflation target has taken on new urgency in recent months, as policymakers and market participants debate whether the country’s current approach is fit for purpose. With a headline inflation target range of 3% to 6% in place since 2000, South Africa now stands out among its peers for maintaining a relatively high and wide band, while most other emerging markets have moved to lower, often point-based targets.
A shift to a lower, more precise inflation target – such as a 3% headline inflation rate – could bring about a range of macroeconomic benefits. These include reduced inflation and borrowing costs, improved policy transmission, and stronger economic growth. However, the transition must be carefully managed to avoid unintended consequences for investment and employment.
Why a new target?
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. 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.
A lower inflation target would help to align South Africa with global best practice. It would also reduce uncertainty for businesses and households, making it easier to plan for the future and invest in productive assets. 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.
The mechanics of change
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. This, in turn, influences wage and price-setting behaviour, leading to lower actual inflation and, over time, lower nominal interest rates. The transition period is not without risks. In the short run, tighter monetary policy could temporarily slow economic activity as real interest rates rise. However, 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, when the South African Reserve Bank (SARB) began targeting the midpoint of the current range in 2017, inflation expectations adjusted quickly, and the economy saw little disruption.
The benefits: more than just lower inflation
Lower inflation brings a host of benefits. It reduces uncertainty, which is a major boon for investment. When firms and households can be more confident about future prices and interest rates, they are more likely to invest in productive assets, expand businesses, and create jobs. Lower inflation also means lower borrowing costs, which is particularly important in a country where high interest rates have long been a drag on growth.
For the government, lower inflation means reduced debt-service costs, freeing up resources for social spending and infrastructure. The fiscal windfall from a lower inflation target could be substantial, with potential savings running into hundreds of billions of rands over the next decade. These savings would create more fiscal space for critical priorities like education, health, and infrastructure.
From a social perspective, lower inflation helps to protect the purchasing power of lower-income households, who are most vulnerable to rising prices. It also supports job creation, especially for less-skilled workers who are more sensitive to changes in economic growth.
The exchange rate and investor confidence
A credible commitment to a lower inflation target can also have a positive impact on the rand. When investors believe that inflation will remain low and stable, they are more likely to invest in rand-denominated assets, boosting demand for the currency and helping to stabilise its value. This was evident earlier this year when the rand strengthened on market optimism about improved monetary policy credibility.
However, the transition must be managed carefully. 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. The key is to balance inflation control with growth and investment needs, ensuring that the benefits of lower inflation are not offset by unintended consequences.
Managing the transition
The success of a lower inflation target depends 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. 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.
Administered prices – such as those for electricity, water, and transport – are a particular challenge. These prices are often set by government or regulators and can be slow to adjust to changes in inflation. 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 broader economic picture
South Africa is not alone in grappling with these questions. Many emerging markets have already lowered their inflation targets, recognising that the benefits of price stability outweigh the short-term costs of transition. The experience of countries like Brazil, Mexico, and Chile shows that a credible, well-communicated policy shift can deliver lasting gains in growth, investment, and social welfare. Maintaining central bank credibility, however, is crucial. When the public trusts that the central bank will deliver on its promises, inflation expectations adjust more quickly, and the costs of transition are minimised. South Africa has already made progress in this regard, as the SARB’s credibility has improved over the years.
Now is a compelling time to revisit South Africa’s inflation-targeting framework. With inflation currently at the lower end of the target range and central bank credibility high, the costs of moving to a lower target are likely to be minimal. The benefits, on the other hand, could be transformative, delivering not just lower inflation, but stronger growth, better fiscal outcomes, and a fairer society.
A headline consumer price inflation target of 3% – ideally as a point target – would reduce uncertainty, lower borrowing costs, boost growth, and protect the most vulnerable. The transition would require careful management and clear communication, but the potential rewards are substantial and long-lasting.
TURNING TO THE MARKETS
The week’s key themes:
- 10-year UK government gilt yield drops to lowest level in over three weeks.
- Wall Street looks towards employment data.
- Gold prices remain elevated on the back of uncertainty.
- Dollar faces weekly loss.
Bonds
In the United States (US), the 10-year Treasury yield is steady at about 4.39%. This follows a week of big swings as investors wait for new job numbers to assess how strong the US economy is. Recent weak data on jobs and business activity has raised fears that the new tariffs introduced by President Trump are starting to slow economic growth and economic sentiment.
In the United Kingdom (UK), the 10-year government bond yield has dropped to its lowest level in over three weeks, helped by strong demand for long-term bonds. However, a Bank of England official has warned that selling government bonds can affect longer-term interest rates differently than cutting rates, suggesting the bank should reconsider how quickly it sells these bonds. Meanwhile, the Organisation for Economic Co-operation and Development has cut its growth forecast for the UK, citing trade tensions, government budget limits, and ongoing inflation as key risks.
In Germany, the 10-year bond yield has fallen to its lowest level in nearly a month after the European Central Bank (ECB) cut interest rates and lowered its inflation outlook, suggesting price rises will slow down further. The ECB has also signalled that it may pause further rate cuts soon.
In South Africa, the 10-year bond yield has eased to around 10% as lawmakers moved to approve the fiscal framework of the budget. Markets are also keeping a close eye on the SARB for any signals around the inflation target changes as outlined above. While bond prices are upbeat, South Africa’s fundamental economic challenges remain, such as poor growth and high unemployment.
Indices
US stock futures are steady as investors wait for the latest jobs report, which will provide an indication of how healthy the US job market is. Recent figures suggest hiring is slowing down, raising worries that new tariffs from President Trump might be hurting the economy. On Thursday, major US stock indices fell, with electric car manufacturer, Tesla’s shares dropping sharply after a public argument between President Trump and billionaire, Elon Musk. Trump criticised Musk for opposing a major government spending plan and hinted that Musk’s companies could lose government support. Hopes for progress in US-China trade talks faded after a call between President Trump and Chinese President Xi didn’t lead to any breakthroughs.
In the UK, the main stock market index, the FTSE 100, remained flat for the fourth day on Thursday. Confidence was shaken as resource exploration and production company, Cobalt Holdings cancelled its planned stock market launch, and ultra-low-cost airline, Wizz Air’s shares plunged after it warned about rising costs. Online financial trading platform, CMC Markets also saw its shares fall, despite posting higher profits. The UK statistics agency admitted it had understated April’s inflation rate but said it would fix the error going forward.
Germany’s DAX index reached a new record high, helped by the ECB’s decision to cut interest rates again and lower its inflation forecasts. German factory orders also rose unexpectedly, showing strong demand.
In South Africa, the main stock index, the FTSE/JSE All Share index, has jumped over 14% since the start of the year. Areas of support for the index includes attractive valuations, low inflation and therefore lower interest rate forecasts and improved sentiment.
Commodities
Oil prices rose this week, with Brent crude trading near $65/barrel. This increase is partly due to higher demand expected during the summer, as well as concerns that trouble in certain parts of the world could disrupt oil supplies. Wildfires in Canada have also temporarily reduced the country’s oil output by about 7%, though the situation has improved as rain helped control the fires. However, the momentum for higher prices slowed after Saudi Arabia pushed for the expanded Organisation of Petroleum Exporting Countries, OPEC+, to boost oil production by over 400,000 barrels per day in August and possibly September, aiming to meet summer demand. Saudi Arabia also lowered the price of its oil for Asian buyers to the lowest level in almost four years, suggesting that demand in the region is weakening. Investors are also paying close attention to US-China trade talks, which could affect how much oil is used globally.
Gold prices climbed to around $3,360/ounce this week. The rise is mainly due to recent US economic data, which has been weak, causing investors to look for safer assets to invest their money. Expectations that the US central bank, the Federal Reserve (Fed), may not raise interest rates further have also made gold more attractive. Gold is on track for a weekly gain of about 2%.
Currencies
The US Dollar Index is steady at around 98.8 as traders wait for the May jobs report, due out today, which is expected to give a clearer picture of the US economy. Earlier in the week, the dollar lost ground after several weak economic reports suggested that President Trump’s tariffs might be hurting growth. Data showed more people filing for unemployment, fewer new private sector jobs, and a slowdown in services. While Trump is pressuring the Fed to lower interest rates, the Fed remains cautious due to uncertain trade policy. As a result, the dollar is set for a weekly loss.
The euro remains strong above $1.14/€, helped by the weaker dollar and the ECB’s decision to cut interest rates and lower its inflation forecasts. The ECB signalled it may pause further rate cuts soon, with inflation expected to stay close to its 2% target over the next few years.
The British pound has risen to a near three-year high, supported by stronger UK economic data and a new defence plan. A weak dollar has also helped, especially after Trump announced higher tariffs on steel and aluminium. UK assets remain attractive as the economy appears more resilient to global trade risks.
The South African rand strengthened to R17.86/$ before giving back some of its gains. The positive move for the rand is largely thanks to a softer dollar and positive news on the national budget. South Africa’s economy grew slightly in the first quarter of 2025, mainly due to a strong agriculture sector, which helped avoid a contraction, but the economy remains on fragile ground.
*Please note that all market information and data is at the time of writing.
Key indicators:
USD/ZAR: 17.75
EUR/ZAR: 20.30
GBP/ZAR: 24.05
GOLD: $3,383
BRENT CRUDE: $65
Sources: SARB Working Paper Series WP25/05, Reuters, Bloomberg, Trading Economics and LSEG Workspace (Refinitiv).
Written by: Citadel Advisory Partner and Citadel Global Director, Bianca Botes.