South African Reserve Bank Governor Lesetja Kganyago. (Photo: Leila Dougan) 
“This is the first time in a quarter of a century that the government has changed the target. The new target will anchor inflation at permanently lower levels. This will reduce the cost of living and borrowing costs for households, businesses and the government, supporting higher long-term economic growth and job creation,” Godongwana said in a foreword to the Medium Term Budget Policy Statement (MTBPS) 2025 on Wednesday, 12 November.
In June this year, Reserve Bank Governor Lesetja Kganyago reiterated his argument for a lower inflation target, saying that the current rate undermined the value of the rand and contributed to persistent price increases. The SA Reserve Bank, along with the National Treasury, carried out a technical review of the inflation targeting framework and submitted recommendations to Kganyago and Finance Minister Enoch Godongwana.
“Although an inflation rate of 4.5% may seem moderate, it still causes prices to double every 16 years,” Kganyago noted in the SARB’s annual report. “This is hard to reconcile with our constitutional obligation to safeguard the value of the currency. The main concern with South African inflation is not our ability to hit the target,” Kganyago said. “Rather, it is that our target is high compared to other countries. For this reason, despite our success in stabilising inflation, the price level is almost 20% higher than it was in 2021.”
According to the bank’s modelling, shifting to a 3% target would yield significant benefits, with inflation expectations declining quickly while “borrowing costs would fall more significantly” compared with the Sarb’s baseline forecast.
Speaking to the media in the morning, Kganyago hastened to clarify: “This is not my target, this is the country’s target. The minister and I have agreed, 3% is in line with our peers. This is something the National Treasury and the SA Reserve Bank have studied comprehensively for some time. Every policy has trade-offs, what is important is that the benefits outweigh the costs.”
“There is only one winner here — South Africans, who will now enjoy a low inflation economy,” he said.
Daily Maverick columnist Natale Labia says one of the clear drivers for the push to lower the inflation target has been investor appetite.
“Global asset managers have been pressuring the government to support the Sarb’s plan in the hopes that a lower target would permanently reduce bond yields and lending rates. South African bonds and the rand have both strengthened recently, with South African borrowing costs at a three-year low,” he said.
“There is some merit in the proposal. South Africa’s base interest rate keeps the prime lending rate near 11%, with 10-year bond yields around 10%. These rates are at least partly elevated because of the high upper bound of the inflation target. It is for this reason that other emerging economies, like Brazil, have already lowered their targets — from 4.5% to 3% — with a 1.5% tolerance range. It is clear that international investors would like to see an emerging market like South Africa fit into what they see as global monetary policy best practice,” Labia noted.
The government and labour unions agreed on a 3-year wage agreement in February 2025. The first-year increase is 5.5% in 2025/26, while the two outer years will be CPI-linked. However, the assumption was that inflation would be around 4.5% rather than the 3% new inflation target, which implies that wage agreements may need to be renegotiated or revised downwards.
The Medium Term Budget Policy Statement concedes that lowering the inflation target could well result in a lower nominal GDP, which in turn would result in reduced revenue projections and a less favourable debt-to-GDP ratio.
Gross debt-to-GDP outlook
However, it goes on to note that “the long-term benefits clearly outweigh these shorter-term concerns. Lower inflation will support higher levels of real economic growth. South Africa’s inflation target will be more in line with its trading partners and peer economies, making the economy more competitive. Household spending and private investment will rise due mainly to higher real disposable income and lower borrowing costs.”
The National Treasury also anticipates that the negative impact of the fall in revenues on the Budget balance will be counteracted by the reduction in debt-service costs, with the net result that the fiscal balance continues to improve steadily over the forecast period.
Debt service costs-to-revenue
The change in the inflation target, which effectively moves to a 2% to 4% range, will see a gradual adjustment of inflation and inflation expectations by the SA Reserve Bank over the next two years, with Kganyago and Godongwana working in symmetry to ensure a smooth outcome and maximum benefits. DM