South Africa must recalibrate its inflation target to spur growth
Opinion
When the Sarb first introduced inflation targeting in 2000 the first decade was marked by significant volatility, with inflation averaging 6.2% and peaking at 13.7% in August 2008.
Image: Ron | IOL
SOUTH Africa’s consumer inflation, which edged up to 3.4% year on year in August 2025 from 3.3% in July, may seem a marginal movement.
Yet, this figure, which sits just above the lower bound of the SA Reserve Bank’s (Sarb’s) long-standing 3 to 6% target range, is a critical inflexion point. It demands a renewed and urgent scrutiny of the nation's monetary policy framework, particularly as the economy grapples with stagnation.
Price stability is the bedrock of sound macroeconomic management. When the Sarb first introduced inflation targeting in 2000 under then Minister of Finance Trevor Manuel, the first decade was marked by significant volatility, with inflation averaging 6.2% and peaking at 13.7% in August 2008.
It was only under the governorship of Gill Marcus (2009-2014) that inflation began to settle closer to the 6% mark.
The implications of sustained lower inflation are generally favourable, offering a much-needed reprieve from borrowing costs for households and businesses, particularly small and medium-sized enterprises.
However, the true measure of policy impact lies in the real interest rate, the nominal rate minus inflation. A prolonged period of low inflation, if it deviates from the central bank’s desired trajectory, can signal underlying economic fragility or limit the scope for necessary policy intervention.
The current debate extends beyond mere price movements; it is intrinsically linked to the money supply and the imperative for fiscal discipline. Global developments, such as the substantial fiscal expansion in the US with the “One Big Beautiful Bill Act”, which some estimates suggest could add $3 trillion to federal debt over the next decade, have intensified the debate over central bank autonomy and the perils of unchecked government spending.
While South Africa’s economic landscape is distinct, the need for fiscal prudence remains paramount to anchor inflation expectations.
Crucially, the Sarb has initiated discussions regarding a potential recalibration of its inflation objective, contemplating a narrower target of 3%. This shift from the wide 3 to 6% band, currently being deliberated with the National Treasury, has been met with positive sentiment from financial markets.
As the Deputy Minister of Finance, David Masondo, has noted, a lower inflation target can potentially decrease the likelihood of social unrest, given the country’s profound inequalities. Conversely, the former chief executive of Goldman Sachs sub-Saharan Africa has warned that without government interventions to grow the tax base, create jobs, and spend productively, the potential for a systemic meltdown remains a serious risk.
International experience suggests that once inflation is firmly anchored within the 1 to 3% range, it tends to exhibit greater stability. The existing 3 to 6% band is increasingly perceived as unduly wide given the SARB’s ambition to entrench lower prevailing inflation.
Achieving this tighter target will necessitate robust government support, particularly in moderating price-linked wage settlements, especially as administered prices are projected to continue rising faster than general inflation.
The primary tool for managing inflation remains the interest rate, which must be set at an appropriate level above the inflation rate. Fundamentally, inflation often manifests as a symptom of economic inefficiencies. By maintaining positive real interest rates, central banks encourage the efficient allocation of capital, thereby mitigating inflationary pressures.
The global adoption of inflation targeting has largely transformed inflation from an intractable economic challenge into a manageable one. Central banks in developed economies, including the Sarb, responded decisively to the post-pandemic surge by significantly raising interest rates.
While inflation in these economies has yet to fully revert to pre-pandemic levels, it has largely receded to a point where it no longer poses a systemic threat to macroeconomic stability.
To conclude, for South Africa, where the cost of living has already escalated, stabilising inflation at around 3% would be a significant achievement. Such a development would facilitate a repricing of the entire interest rate structure to lower levels, offering much-needed relief to an economy currently grappling with stagnation.
The positive economic benefits stemming from lower interest rates, including stimulated investment, reduced debt burdens, and increased consumer confidence, would provide a vital impetus, contributing significantly to revitalising the nation's economic momentum.
* Nyiko Ashley Mabasa is a developmental economist and executive manager in the Office of the Deputy Minister of Mineral and Petroleum Resources.
** The views expressed here do not reflect those of the Sunday Independent, IOL, or Independent Media.