South Africa’s inflation target, which was between 3% and 6%, was lowered to 3% in the medium-term budget in parliament on Wednesday (12 November), with a tolerance band of 1 percentage point.

By Alani Janeke, senior journalist at African Farming and Landbouweekblad

This new target immediately replaces the previous target range of between 3% and 6%, and will be implemented over the next two years.

Enoch Godongwana, Minister of Finance, came to an agreement with the Reserve Bank on this target after consulting with President Cyril Ramaphosa and the Cabinet.

The 1 percentage point band provides flexibility to accommodate any unexpected inflationary shocks.

According to the Reserve Bank, 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.

“As part of a broader review of macroeconomic policy and in line with international developments, the National Treasury and the Reserve Bank, have conducted extensive research both separately and jointly as part of the Standing Committee on Macroeconomics, on the appropriate level of the inflation target,” the Reserve Bank said in a statement.

“This work has now been concluded and recommends a revision to the target to strengthen the framework and enhance price stability by better anchoring inflation expectations and aligning South Africa to international best practice.

“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.”

According to the Reserve Bank, the benefits and costs of a lower target were carefully considered in the decision. The short-term fiscal costs of a lower target, which include lower nominal GDP and revenue growth, will make achieving fiscal targets more challenging. Yet the long-term benefits of taking this step far outweigh these costs.

The target will be continuously pursued and any deviations from it will be clearly communicated.

Better Economic Growth Expected in 2025

Godongwana said a growth rate of 1.2% is expected for the local economy. This is more than double the growth rate in 2024.

The growth outlook strengthens moderately in the medium term. “We now forecast real GDP (Gross Domestic Product) growth will average 1.8 per cent between 2026 and 2028.”

According to Godongwana the structural reforms the government has embarked on, particularly in energy and logistics, will be key to lifting the country’s growth rate closer to levels demanded by the country’s developmental needs.

The government’s strategy for faster growth and healthier finances continues to be anchored on four pillars: