SARB defends lower inflation target as key to boosting real incomes and spending power

The South African Reserve Bank (Sarb) Governor Lesetja Kganyago has defended the government’s decision to lower the inflation target, saying the move is aimed at protecting the value of money, enhancing consumer purchasing power, and improving fiscal efficiency.

This comes as Finance Minister Enoch Godongwana on Wednesday officially reduced South Africa's inflation target to 3% with a tolerance band of 1 percentage points on either side over the next two years in a bid to ease the elevated cost of living on consumers.

This new target immediately replaces the previous target range of between 3 and 6% with a midpoint of 4.5%, which has been implemented since 2000.

Over the past year, the National Treasury and the Sarb conducted joint research on the benefit of a lower inflation target on the economy and the fiscal framework.

Speaking during an embargoed media briefing before the tabling of the Medium-Term budget Policy Statement, Kganyago said lowering the inflation target would anchor expectations, enhance predictability in the economy, and ultimately strengthen both household and government spending.

“You see, when inflation walks through the door, public trust jumps out through the window and the money becomes worthless. The lowering of the target is one thing, achieving it is another,” Kganyago said.

“By lowering the target and tasking the Reserve Bank with achieving that target, what you are actually doing is protecting the value of money. You are enabling the rent to go an extra mile in terms of the basket of goods and services that it can actually purchase.”

South Africa's average inflation rate is higher than trading partners and emerging market peers, which erodes the country's competitiveness and causes the rand exchange rate to depreciate. Higher inflation also increases the cost of living to the detriment of households, particularly the poorest and most vulnerable.

Kganyago explained that lower inflation allows the rand to “go an extra mile” in terms of what goods and services it can purchase.

According to the Sarb’s calculations, anchoring inflation expectations at a lower level would increase real disposable income — a key factor in supporting household consumption, which accounts for more than 60% of South Africa’s GDP.

“By increasing the buying power of money through the lowering of the target and the lowering of inflation, we make South Africa a low-inflation economy, which makes decision-making around investment and consumption more predictable,” Kganyago said.

Kganyago said this approach would align South Africa’s framework with international best practice while improving policy clarity.

“There are basically two inflation targeting regimes — you could have a band, which is what we have had for a very long time, or you could have a point,” he explained. “The tolerance band says you are aiming for three. If you are deviating and within these margins, you are okay.”

Kganyago added that the bank’s quarterly projection model operates on a specific point rather than a range, and the deviation from the target helps guide monetary policy decisions over time.

He also emphasized that the Reserve Bank would maintain flexibility when responding to external shocks such as oil price spikes or food inflation, distinguishing between temporary and persistent pressures.

“If the shock is of a temporary nature, we look through it,” he said. “You do not adjust policy just because you have had a sudden rise in food or oil prices. You wait to see if there are second-round effects — whether those shocks lead to other prices in the economy rising more broadly.”

Meanwhile, Godongwana said fiscal and monetary policies, the twin pillars of economic governance, must work together to lower inflation and borrowing costs for households and firms, while keeping debt-servicing costs affordable.

"The 1 percentage point band provides flexibility to accommodate any unexpected inflationary shocks. This is in line with South Africa’s approach to inflation targeting, which has always been a flexible one, looking beyond short-run deviations in inflation."

Godongwana said the Sarb will pursue the target on a continuous basis and clearly communicate any deviations from the target. Over time, he said the lower target will decrease inflation expectations and inflation, creating room for  lower interest rates.

"This supports household spending and business investment, boosting economic growth, and job creation. The short-term fiscal costs of a lower target, which include lower nominal GDP and revenue growth, will make achieving fiscal targets more challenging," Godongwana said.

"Yet the long-term benefits of taking this step far outweigh these costs. We remain committed to ensuring that our macroeconomic policies serve the best interests of all South Africans."

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