Is South Africa sacrificing growth and jobs at the altar of inflation targeting?

South Africa’s monetary policy debate must be released from a technical dispute confined to economists and central bankers. It must be centred on a developmental question: can an economy trapped in economic stagnation, deindustrialisation, structurally high unemployment and deep inequality afford a monetary policy framework primarily designed around disinflation and investor credibility? Or has the time come to rethink what “price stability” should mean in a structurally constrained developing economy like ours?

South Africa’s inflation fight is occurring inside a low-growth trap

For more than a decade South Africa has experienced one of the weakest growth performances in the democratic era, averaging 1% and far below other emerging and developing economies (EMDEs) average of 4% to 5% since the global financial crisis. Fixed investment has collapsed from developmental-state levels to roughly 14% of GDP, significantly lower than the 25% to 30% observed in other EMDEs and advanced economies. Investment-to-GDP ratio of 25% to 30% is typically associated with sustained industrialisation and employment-intensive growth. At the same time, official unemployment remains above 30% (or more than 40% including discouraged workseekers), youth unemployment, even in the narrow definition exceeds 45%, household indebtedness continues to constrain domestic demand, and the high cost of capital retards investment in the productive sectors and erodes fiscal space.

Yet, despite this profound structural weakness, South Africa’s macroeconomic policy regime has become increasingly restrictive. Between 2022 and 2023, the South African Reserve Bank (SARB) raised the repo rate aggressively, taking it from 4.25% to 8.25% in one of the sharpest tightening cycles in recent history. The rationale was familiar: inflation expectations needed anchoring, credibility had to be preserved and inflation needed to return decisively to target.

But the central contradiction is this: much of the inflationary pressure South Africa experienced during this period was not driven by excessive domestic demand. The Reserve Bank and International Monetary Fund reports admit that inflation was driven by global oil prices, supply chain disruptions, exchange rate volatility, logistics bottlenecks and rising food costs – precisely the kinds of shocks that interest rate hikes are poorly designed to address.

This matters enormously because it illustrates that monetary policy is not neutral. Excessively raising interest rates in a structurally weak economy does not simply “cool inflation”. It suppresses investment, weakens construction activity, increases household and government debt service costs, raises borrowing costs for firms and municipalities and slows job creation. In an economy already experiencing demand constraints and deindustrialisation, aggressive tightening risks deepening stagnation while leaving the underlying drivers of inflation largely unresolved.

The SARB’s constitutional mandate is broader than inflation alone

Debates around South Africa’s monetary policy conduct are often presented as though the SARB has a single mandate: fight inflation at all costs. But that is not what the Constitution says. Section 224 requires the Bank to “protect the value of the currency in the interest of balanced and sustainable growth.” That constitutional framing is important. It does not mandate inflation reduction in isolation. It explicitly links monetary stability to broader developmental outcomes. In that sense, the SARB’s approach in the past decade has focused on the narrow disinflation objective to the neglect of the constitutional injunction to support balanced and sustainable growth.

South Africa’s monetary framework has evolved from what was initially presented as “flexible inflation targeting” towards a far harder anti-inflation stance in practice. Growth, investment and employment considerations increasingly appear subordinated to the language of credibility, expectations and disinflation. The recent shift towards a 3% inflation target further entrenches this trajectory. The irony is that South Africa may now be pursuing one of the most conservative inflation regimes among developing economies despite having one of the highest unemployment rates in the world.

This reflects deeper inconsistencies in design and implementation, and the idea that central banks should focus narrowly on price stability while growth and employment are left to markets and structural reforms. The development of a lower inflation framework as a monetary policy imperative emerged in advanced economies under very different structural conditions. South Africa is a developing country characterised by low employment and high levels of poverty leading to demand deficiencies. It is a structurally unequal middle-income economy grappling with weak industrial capacity, energy constraints, logistics failures, volatile capital flows and chronic underinvestment. Treating inflation primarily as a monetary phenomenon in this context risks misdiagnosing the problem itself.

South Africa’s inflation problem is increasingly structural

The country’s recurring inflation pressures are deeply tied to domestic structural bottlenecks and fragmenting international financial, political and trading systems. When global oil prices spike because of geopolitical conflict in the South West Asia and North Africa region, domestic interest rate hikes do not lower petrol and diesel prices. When food inflation is driven by climate shocks, logistics failures or concentrated value chains, suppressing credit demand does not solve supply shortages. When administered prices rise because of electricity and transport crises, tighter monetary policy cannot repair Eskom or Transnet.

Indeed, one of the central weaknesses of South Africa’s current framework is that too much of the anti-inflation burden falls on the repo rate, while insufficient attention is paid to structural supply-side interventions. A more developmental monetary policy would begin by recognising this distinction clearly.

The SARB should institutionalise a far more explicit “look-through” approach to temporary supply shocks and employ a more appropriate tolerance band to inflation. The Monetary Policy Committee (MPC) should publicly decompose inflation drivers at every meeting, distinguishing between fuel, food, exchange rate pass-through, administered prices and domestic demand pressures. In addition to constraining the SARB’s policy space, the current lower inflation target of 3% compels the MPC to penalise working families for imported supply shocks, increase government debt service burdens and reduce public investment. Instead of artificially cooling domestic demand, monetary policy should be patient and act only if imported inflation causes a wage price spiral and persistent, structural domestic inflation.

At the same time, the Bank should operationalise the real-economy side of its constitutional mandate alongside other economic departments via a comprehensive macroeconomic framework. Every interest rate decision should explicitly assess expected effects on investment, employment, SME credit conditions, household and government debt burdens, and productive capacity over the medium term. This would mean price stability is pursued in conjunction with developmental outcomes, especially in a structurally highly unequal economy such as South Africa.

Towards more developmental central banking

Critics often present developmental monetary policy as reckless or populist. But internationally, central banks increasingly use broader policy instruments beyond conventional interest rate adjustments to support economic development and decent work creation while maintaining independence and providing meaningful credibility.

Following the global financial crisis and Covid-19 shock, the US Federal Reserve, European Central Bank and Bank of England all adopted extraordinary liquidity and funding measures to support economic stability, credit transmission and productive activity. Brazil and Chile have historically used more flexible approaches to inflation management within broader developmental frameworks. This indicates that central banks increasingly recognise that financial stability, employment and macroeconomic coordination matter.

A developmental approach can be undertaken with central bank operational independence, which recognises price and financial stability objectives. This requires expanding the policy imagination beyond a singular reliance on demand suppression, and for Parliament to resolve existing ambiguity in interpreting the central bank mandate by explicitly formulating it so that the SARB operationally supports sustainable growth. This would need to include:

• Stronger macroeconomic coordination between SARB, Treasury, industrial policy institutions and development finance institutions;
• Targeted credit and prudential mechanisms supporting productive sectors;
• Differentiated responses to supply shocks;
• Developmental financial regulation; and
• A broader conception of stability itself.

An economy with permanently high unemployment, collapsing infrastructure, low investment and rising social instability is not truly “stable”, even if inflation temporarily falls within target. The monetary policy debate should ultimately be about the kind of economy South Africa wants to build. Given the country’s objective to attain structural transformation, industrialisation, rising employment, climate resilience and inclusive growth, then macroeconomic policy, including monetary policy, must become more developmental, coordinated and responsive to South Africa’s realities. The current framework is not consistent with these objectives. DM

This article forms part of a debate series curated by the Institute for Economic Justice, published by Daily Maverick, to deepen understanding of South Africa’s economic challenges.

It accompanies the IEJ’s podcast series Economic Justice Matters. The first podcast of the 2026 season asked whether the economy has turned the corner. The second episode deals with debates around the Reserve Bank’s role and monetary policy. Gina Schoeman Ackermann (Citibank managing director) joins Dr Mzwanele Ntshwanti and Dr Roelof Botha (independent economist) in a lively discussion. Watch the full conversation here.