South Africa’s New 3% Inflation Target Sets Stage for Major Economic Shift

South Africa’s new inflation target of 3%, supported by a one-percentage-point tolerance band, has shifted the country’s focus toward implementation, communication and next week’s key monetary policy committee meeting.

Announced in Wednesday’s medium-term budget policy statement (MTBPS), the target now aligns with those of major trading partners and represents the biggest monetary-policy shift in 25 years. It follows months of uncertainty and visible tension between the Treasury and the Reserve Bank.

By adopting a lower and more credible inflation anchor, government and the Bank aim to strengthen price stability, reduce borrowing costs and improve investor confidence. A well-anchored target also supports a stronger rand, more stable wage negotiations and better long-term fiscal planning.

Finance minister Enoch Godongwana warned in the MTBPS that, in the short to medium term, lower inflation targeting would reduce nominal GDP and revenue projections, which could negatively affect the debt-to-GDP ratio. However, he stressed that this will be offset by lower debt-service costs, adding that the long-term gains far outweigh the short-term drag. Lower inflation, he said, will support stronger real economic growth and help reduce inequality, as low-income households suffer most from rising prices.

Household spending and private investment are expected to rise due to higher disposable income and lower borrowing costs. Over time, the lower anchor should pull inflation expectations closer to 3%, allowing for permanently lower interest rates and stronger job creation.

Before the MTBPS, Reserve Bank governor Lesetja Kganyago emphasised that the new 1% tolerance band provides necessary flexibility, allowing temporary deviations from the 3% target without triggering immediate policy tightening. He said effective policy requires balancing costs and benefits, and the new framework achieves that.

The move has been years in the making. The Bank shifted its focus to the midpoint of the old 3%–6% range in 2017, and by 2021 was arguing that even 4.5% was too high for an emerging market seeking competitiveness and wage-price stability. As inflation began drifting lower, the Bank intensified its communication and research efforts, pushing strongly for a lower anchor.

Tensions peaked in July when Kganyago surprised markets by publicly stating that policy would now be guided by 3% — before Treasury’s formal approval. Godongwana immediately pushed back, calling the move unilateral and premature. Markets reacted with concern over policy co-ordination. Yet expectations shifted quickly, and five-year inflation expectations have since fallen to a record-low 4.2%, according to the Bureau for Economic Research.

A joint statement issued on September 1 signalled that the rift had been resolved. Asked on Wednesday if he felt vindicated, Kganyago replied that the target belonged to the country, not him. “There’s only one winner today,” he said, “and that is South Africans who will enjoy a low-inflation economy.”

The Reserve Bank’s October Monetary Policy Review further backed the shift, showing sharply reduced inflation volatility, more forward-looking pricing behaviour and forecasts indicating inflation will ease to 3.3% in 2025/26 and reach the new 3% target in 2027. Stress tests suggest the anchor can hold even under major global or commodity shocks.

One scenario shows the new anchor enabling up to five extra rate cuts over the next two years, potentially pushing the repo rate toward 6%, compared to an estimated 7% endpoint under the previous target structure.

The MTBPS warned that geopolitical tensions, exchange-rate swings, rising administered prices and agricultural risks could still put upward pressure on inflation. In contrast, strong agricultural output and a firmer rand would help lower food and import prices.