The South African Reserve Bank believes the government should consider lowering the inflation target.
In an economic overview of the central bank’s annual report released this week, governor Lesetja Kganyago said South Africa’s performance has begun to deteriorate relative to the other G20 countries due to the high rate of inflation, ranking tenth.
“Last year we had the fourth highest rate of inflation in the G20, below only Turkey, Argentina, and Russia — all countries with much more adverse monetary dynamics. IMF projections show we will slip to [the] third-worst G20 country from 2026, leaving us ahead of only Argentina and Turkey. For all the pride we take in our monetary policy, at the SARB this is not much to boast about.”
The current inflation target of between 3% and 6% was set by the cabinet as a policy decision on the advice of the National Treasury and the minister of finance. Maintaining inflation within this target is the responsibility of the central bank.
Kganyago said a relatively high inflation target was in place for nearly a quarter-century, but it was never the central bank’s intention to see the 3–6% target lasting forever.
“Indeed, there was an announced reduction of the target, to 3–5%, which was unfortunately abandoned following the 2001 rand sell-off. This was a policy mistake and thus left us with unfinished business.”
An inflation target of 3–6%, even where that is interpreted as an objective of 4.5%, is high relative to South Africa’s peers, which affects the country's competitiveness, he said.
“It also means a bad user experience for our people. An inflation rate [of] around 4.5% forces everyone to adjust prices, wages, and investments routinely to avoid losing buying power.”
Efficient Group economist Dawie Roodt said Kganyago was a hawk who wanted low inflation and would readily use monetary policy or interest rates to get it as low as possible “no matter what”.
“That is ... the kind of central banker that we want in South Africa. Inflation has traditionally been much higher than in our most important trading partners and that’s bad for the currency because if our inflation is higher than that of our most important trading partners then our currency will keep on losing value against those currencies.”
He said if inflation could be brought down in line with that of South Africa’s most important trading partners, the exchange rate would be better maintained, which would feed into the economy.
Redge Nkosi, the executive director and head of research for money banking and macroeconomics at Firstsource Money, rejected the idea of a lower inflation target.
“The governor is entitled to his own opinion, but frankly he is not entitled to his own economics at all. We know that inflation targeting should have never been the framework used by a developing economy. It was adopted by people who did not understand what inflation targeting is or what it means for the economy.”
Inflation has traditionally been much higher than in our most important trading partners and that’s bad for the currency because if our inflation is higher than that of our most important trading partners then our currency will keep on losing value against those currencies
— Efficient Group economist Dawie Roodt
Nkosi said former Federal Reserve chair Janet Yellen advocated moving the inflation target upward from 4%. He said the monetary policy committee’s insistence on inflation targeting showed a misunderstanding of global macroeconomics.
He said the inflation that had afflicted South Africa and other developing countries was not the kind of inflation that required interest rates as a tool with which to respond. Rather, he said, this was supply-side inflation, which would go down on its own and would not be affected by the Reserve Bank.
Prof Raymond Parsons of North-West University’s Business School said inflation targeting had served the economy well over the years and should be retained, although he welcomed the Bank's openness to reviewing possible adjustments.
“The cabinet set the current 3-6% inflation target range in 2000, and the SARB has ‘operational independence’ in achieving it. Presently, the Bank aims at the inflation target being fixed around the middle of the band, 4.5%. (It) has proposed that a narrower lower target of, say, 3% would be more appropriate for South Africa.”
A narrower target could be one of the key decisions the cabinet formed under the government of national unity may eventually have to make about the economy.
“It is important that there should be a robust economists’ and stakeholder-involvement debate about any revised inflation target. In other countries where inflation targeting is used, decisions around the target are regularly reviewed and debated.”
The Bank’s annual report said the food and fuel price shocks of 2022 and 2023 had largely passed, but the country now confronted higher core inflation, with services prices accelerating — a trend also reported in many other economies.
“This points to underlying inflationary pressures. We expect inflation to average 5.0% this year, stabilising at 4.5% only towards the end of 2025.”
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