New 3% inflation target: economic relief despite short-term growth challenges

Finance Minister Enoch Godongwana's decision to lower South Africa's inflation target to 3% – ending a 25-year framework of targeting a 3% to 6% range – has bolstered the rand and will bring relief to millions of South Africans.

Godongwana announced during Wednesday's presentation of the Medium-Term Budget Policy Statement (MTBPS).

While conceding that the move will make life harder in the near term, especially for economic growth, the minister says the new target, which takes effect immediately and will be phased in over the next two years, will “enhance price stability”.

Aligning fiscal and monetary policy

Clarity on the move towards the lower inflation target of 3% was something on Anchor Capital economist Casey Sprake's wish list. She says Godongwana's endorsement aligns fiscal and monetary policy.

“While the South African Reserve Bank (SARB) had already been informally targeting this level, the formal adoption by National Treasury cements a clear and cooperative policy framework that enhances credibility and reinforces the SARB's independence,” Sprake says.

Godongwana's statement did, however, come with a caveat in the form of a one-percentage-point tolerance band. “The one-percentage-point band provides flexibility to accommodate any unexpected inflationary shocks,” he says.

Long-term gains versus short-term pain

“Over time, 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,” says Godongwana.

Yet the short-term fiscal costs of a lower target – which include lower nominal gross domestic product and revenue growth – will make achieving fiscal targets more challenging, says Godongwana.

Godongwana expects economic growth to come in at 1.2% this year, almost double that of 2024. However, this represents a downward revision from May's anticipation of an average of 1.6% between 2025 and 2027, which was already significantly lower than the 1.8% forecast two months prior.

“The long-term benefits of taking this step far outweigh these costs,” says Godongwana of the move to change the 25-year-old framework.

Investec treasury risk consultant Kudzai Munetsi previously weighed up the pros and cons, noting that potential long-term gains include a stronger investment and savings culture, supported by predictable inflation. In addition, he foresees enhanced purchasing power, especially for the poor, given that inflation erodes real incomes less over time.

However, Munetsi believes short-term effects could include rising unemployment, especially if inflation is driven by cost-push factors like fuel or food.

Unemployment for the third quarter came in at 31.9%, down 1.3 percentage points quarter-on-quarter, according to numbers released on Tuesday.

Total employment increased by 248 000 quarter-on-quarter, with the largest increases recorded in construction, community and social services, and trade. Conversely, jobs were lost in manufacturing, finance, and utilities.

Kganyago's long-held ambition

SARB Governor Lesetja Kganyago has been pushing for a lower inflation target for some time. Several monetary policy committee (MPC) meetings ago, he started tracking what interest rates would be should such a target be in place.

In August, Kganyago said that lowering inflation to 3% could reduce the neutral policy rate by two percentage points, which would ease the burden on household finances.

The neutral point is a theoretical point at which the economy is perfectly balanced – inflation is stable and there is simultaneously sustainable economic growth. The central bank meets for its last MPC session of the year next week, with a decision to be announced on Thursday.

Prime is currently 10.5%.

“If we lower inflation to 3%, then we can take 1.5 percentage points of inflation out,” the governor said.

September's consumer price index, released on October 22, came in at 3.4%, an increase from the 3.3% reported for August. The next inflation figure is set to be released next Wednesday.

Slower price rises mean goods and services cost less over time, interest rates can be lower, and households have more disposable income. Kganyago says a lower inflation rate “would enable policy to ease and support the economy despite the various factors dragging growth down”.

Dr Elna Moolman, Standard Bank Group head of South Africa Macroeconomic Research, says National Treasury is “gradually restoring South Africa's fiscal sustainability”.

Property sector optimism

The property sector has welcomed the news, seeing it as a catalyst for improved market conditions.

Stephen Whitcombe, MD of Johannesburg property group FIRZT Realty, says “a more disciplined macroeconomic framework, highlighted by the widely expected confirmation that South Africa's inflation target will immediately be reduced to 3%, sets the stage for lower and more stable interest rates over time”.

Berry Everitt, CEO of the Chas Everitt International property group, says the confirmed shift to a lower inflation target of 3%, improved national debt dynamics, and new incentives for private sector infrastructure investment collectively signal a more predictable environment for buyers, investors, and developers.

“The minister's announcement of a new 3% inflation target, with a one-percentage-point tolerance band from 2% to 4%, represents a decisive step toward anchoring price stability and bringing South Africa in line with advanced economies. Over time, lower inflation expectations are expected to pave the way for a sustained lowering of interest rates, even from their current relatively low levels,” Everitt says.

Everitt adds that, “for the real estate market, this would mean improved mortgage affordability and, we believe, stronger household confidence and revived investor appetite after several years of constraints placed on prospective buyers by cost-of-living pressures and cautious credit conditions”.

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