Lesetja Kganyago, the governor of the SA Reserve Bank (Sarb), announced a significant shift in the central bank’s monetary policy approach in July 2025.
He said the Monetary Policy Committee had decided to aim for the lower end of the 3-6% inflation target range, arguing that the current range was “too high and too wide” and in need of reform.
This marks a further tightening of South Africa’s inflation targeting framework following the Sarb’s 2017 declaration that it preferred a 4.5% inflation midpoint.
The announcement triggered a rare public disagreement between the Sarb and National Treasury. At the heart of this debate between the two institutions is the issue of process in determining the goals of monetary policy.
Although Finance Minister Enoch Godongwana has not expressed any view on whether the inflation target should be narrowed to 3%, he said in a media statement that there were no plans to revise the official target.
He also emphasised that any changes should be determined by National Treasury and Cabinet, in consultation with the Sarb.
While this article assumes that the central bank’s mandate and targets should be democratically defined, it argues that the current exclusive prioritisation of low inflation is incompatible with addressing South Africa’s deep socioeconomic challenges. Instead, the Sarb’s mandate should be reoriented toward promoting employment and structural transformation.
The problems of inflation targeting
South Africa officially adopted inflation targeting in 2000, although this approach had been informally applied since at least 1994. Under this regime, the finance minister sets the inflation target, while the Sarb retains independence over the instruments used to achieve it.
The main instrument used by the Sarb to reduce inflation is a higher interest rate. It is true that inflation harms the poor by eroding real incomes, but South Africa’s inflation rate in the democratic era has been relatively low and stable.
When prices have risen, however, it has not been a consequence of domestic inflation – too much money chasing too few goods. Rather, prices have been driven upward by external factors, such as increases in the price of fuel, energy and food, for example.
Some scholars suggest that changes in the domestic inflation rate have less to do with domestic monetary policy and more to do with shifts in global inflation. The implication of this is that – as I have written about in Amandla before – increasing the interest rate is not the answer to curbing inflation.
And, as a former National Treasury official has warned, “reducing the inflation target would lead to more austerity, and lower economic growth and employment”.
In addition, concerns about inflation’s negative impact on economic growth may be exaggerated, as historical evidence suggests. Some even argue that it is only when inflation exceeds 40% that growth rates begin to fall. A World Bank economist has indicated that economic growth has continued even at inflation rates of 15-20%.
Despite this, the Sarb has consistently maintained high real interest rates in its effort to keep inflation within target. As leftist economist Ashgar Adelzadeh has observed, South Africa has recorded some of the highest interest rates in the world over the past two-and-a-half decades.
Consequences of high interest rates
High interest rates result in higher domestic borrowing costs and higher debt repayment costs. This means less disposable income and reduced buying power for the majority of people in the country.
High borrowing costs, coupled with declining domestic demand, lead to the stagnation or contraction of the economy, which, in turn, leads to job losses and lower government revenue from income taxes.
Higher interest rates also mean higher debt-servicing costs on loans denominated in foreign currency, and an interest rate above GDP growth will normally increase the debt-to-GDP ratio. In response, the South African government has drastically cut spending through harsh austerity budgets.
Austerity, along with high interest rates, discourages fixed investment, particularly in sectors such as manufacturing, where borrowing needs are greater due to higher capital requirements than in other sectors.
Between 1994 and 2015, gross fixed capital formation in South Africa averaged only 18% of GDP, which is around 10 percentage points below the average for upper- and middle-income countries.
In stark contrast, South Africa’s financial sector has expanded dramatically. The country now has one of the world’s highest market capitalisation-to-GDP ratios, with capital markets reaching more than five times the average for its income group.
This reflects a broader process of financialisation, in which the finance sector dominates the economy while productive sectors such as manufacturing decline.
This is a serious concern for a country with an unemployment rate exceeding 40%, as the finance sector is less labour intensive and employs fewer people than manufacturing.
By narrowly focusing on price stability via high interest rates, the Sarb undermines employment creation and reinforces an economic model driven by short-term financial returns rather than long-term productive investment.
As such, the current inflation-targeting framework limits the ability of monetary policy to support structural transformation.
An alternative approach
For monetary policy to support employment, the real interest rate must be significantly reduced to stimulate investment. South Africa’s ability to lower interest rates, however, is constrained by global financial conditions.
As the CEO of Nedbank, Jason Quinn, said, “I can’t see the US Federal Reserve cutting rates, and, on that basis, it will be difficult to see SA cut much further.”
This reflects South Africa’s vulnerability to global capital movements, rooted in the liberalisation of financial markets of the mid to late 1980s. After 1994, the post-apartheid government continued to deregulate its capital markets, opening its economy to short-term international capital flows.
As a result, the Sarb relies on high interest rates to attract foreign portfolio investment and maintain balance of payments stability. Without capital controls, lowering interest rates risks capital flight and a weakening rand.
Yet there are viable alternatives – including reintroducing capital management measures, such as capital and exchange controls. Exchange controls regulate local currency in relation to international currency markets by preventing convertibility (direct exchange) of the rand to other currencies.
Meanwhile, capital controls prohibit the export of capital from the country, including foreign and local expatriation of investment income, domestic ownership of foreign assets – and vice versa.
Examples of exchange controls include taxes on cross-border financial transactions, and establishing a dual exchange rate system. This was used effectively in South Africa between 1979 and 1995 through the creation of the financial rand (finrand).
The goal of the dual exchange rate system was to insulate the market for current account transactions from more volatile financial market transactions.
In terms of capital controls, one measure could be restrictions on the repatriation of capital, including minimum stay requirements. This would restrict capital outflows by placing a holding period on foreign investors before withdrawing capital and/or dividends from South Africa. It would prevent the short-term movement of capital and discourage speculative investments.
Other regulatory tools could include limiting non-resident purchases of domestic debt securities and restricting foreign currency borrowing by domestic institutions.
Strengthening the regulation of capital markets through imposing capital and exchange controls would reduce speculative inflows and break the direct link between domestic and foreign interest rates.
The case for capital account regulation
As macroeconomic instruments, capital and exchange controls aim to regulate money flowing in and out of the country. This allows governments greater space to adopt counter-cyclical policies – economic policies that move in the opposite direction to current economic trends. In a downturn, this would mean expansionary fiscal and monetary policies.
Constraining capital flight and limiting exchange rate volatility mitigate the inflationary effects of currency depreciation and reduce the pressure to raise interest rates.
Capital controls also enhance policy sovereignty. When financial outflows are controlled, the central bank does not need to maintain high interest rates to attract inflows. This gives the state greater autonomy over both monetary and fiscal policy.
Furthermore, as Fine and Mohamed (2022) point out, regulating financial flows helps shift the composition of capital toward less volatile and more productive investments.
Moreover, exchange rate stability improves when capital controls limit the volatility of demand for domestic currency.
As John Maynard Keynes famously argued, the management of the domestic economy depends on having the freedom to set appropriate interest rates independently of international conditions. Capital controls are a necessary condition for that independence.
The need for radical change
South Africa’s current inflation targeting regime, rooted in a liberalised financial framework, has failed to address the country’s core development challenges.
High interest rates, driven by the imperative to stabilise prices and attract capital, have suppressed productive investment and contributed to deindustrialisation and mass unemployment.
To break this cycle, the Sarb’s mandate must be reoriented towards employment creation and structural transformation.
Achieving this requires both a shift in the objectives of monetary policy and a reassertion of capital and exchange controls. By strengthening these controls, the Sarb can significantly reduce interest rates and engage in greater levels of direct lending for preferred purposes to support employment creation.
This will also increase macroeconomic (fiscal and monetary) policy space, enhance financial stability and reduce the foreign debt component of total public debt.
Strengthening capital account regulation is not a radical proposal – it is a necessary step towards reclaiming policy space and realising an inclusive, developmental macroeconomic agenda. DM
Co-published with Amandla Magazine.