For the first time in a quarter of a century, South Africa has revised its inflation target, lowering it from a long-standing range of 3 to 6 percent to a fixed 3 percent target, with a 1 percentage point tolerance band on either side. The decision, announced by Finance Minister Enoch Godongwana during the 2025 Mid-Year Budget Review, marks a defining moment in the country’s monetary policy evolution, one aimed at reshaping inflation expectations, supporting lower interest rates, and enhancing economic credibility.
The move follows years of debate within the South African Reserve Bank (SARB) over the need for a narrower and more competitive inflation framework. It comes after Governor Lesetja Kganyago signalled in July that the bank would focus more firmly on the bottom end of the previous target band. “Over time,” Godongwana told Parliament, “this adjustment will help align South Africa with international peers, anchor expectations, and create space for sustainable, lower borrowing costs.”
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Under the new arrangement, inflation will be permitted to fluctuate between 2 and 4 percent, a range designed to provide sufficient flexibility to absorb external shocks, from energy price volatility to supply chain disruptions. Both the Finance Ministry and the Reserve Bank emphasised in a joint statement that the tolerance band would serve as a buffer while ensuring the central bank remains focused on long-term price stability.
The transition to the new target will take two years, allowing businesses, trade unions, and investors time to adjust. The Finance Minister described this as “a deliberate, cautious approach to sustain fiscal consolidation and preserve growth momentum.”
The policy shift was greeted positively by markets. The rand extended gains against the US dollar immediately after the announcement, while the country’s longer-dated international bonds, notably the 2046 maturity, rose by nearly one cent, according to Tradeweb data. Analysts described the reaction as a signal of investor confidence in the government’s renewed.
A Balancing Act: Growth Amid Restraint
Despite the long-term optimism, the adjustment is expected to have mixed short-term effects. A stricter inflation anchor could curb growth and revenue collection in the near term, but it also promises to stabilise debt servicing costs and improve fiscal health over time.
The National Treasury’s mid-year review projects a budget deficit of 4.7 percent of GDP, slightly lower than May’s estimate of 4.8 percent. Meanwhile, South Africa’s debt-to-GDP ratio is forecast to stabilise at 77.9 percent this fiscal year, up from 77.4 percent, while economic growth expectations have been revised downward, 1.2 percent in 2025 and 1.5 percent in 2026, from earlier forecasts of 1.4 and 1.6 percent.
These revisions reflect the broader economic headwinds confronting the country, from subdued household consumption to weaker export demand, but they also highlight the government’s intent to anchor the economy on credibility rather than short-lived expansion.
In Line with Global Best Practice
South Africa’s new framework places it squarely within the global mainstream of inflation-targeting economies. Countries such as New Zealand, the United Kingdom, and Canada operate with central inflation goals around 2 percent, while emerging markets, including Chile and Thailand, have adopted ranges between 2 and 4 percent.
By targeting 3 percent, South Africa aligns its policy with the IMF’s 2025 Global Policy Review, which advocates for developing economies to establish narrower, more transparent inflation bands to bolster central bank independence and improve market predictability.
Reform Through Discipline
For Governor Kganyago, the shift is not simply technical; it’s philosophical. He has long argued that South Africa’s inflation band was “uncompetitive” compared to global peers and that lower inflation is a prerequisite for sustainable investment. “Our credibility as an institution,” he noted earlier this year, “depends on our ability to maintain stable prices without stifling growth.”
That credibility appears to be paying off. Headline consumer inflation stood at 3.5 percent year-on-year in July 2025, within the new band and significantly below the post-pandemic highs that strained the economy between 2022 and 2023.
The Road Ahead: Patience and Precision
The recalibration of South Africa’s inflation target is not merely a policy tweak; it is a quiet assertion of economic maturity. By tightening its target, the government has signalled that stability, not expediency, will guide its fiscal and monetary path.
Yet, success will depend on sustained coordination between the Treasury and the SARB, as well as structural reforms to address energy shortages, logistics bottlenecks, and labour inefficiencies that often feed inflationary pressures.
A Measured Revolution in Pretoria
In an age of global volatility, South Africa’s move stands as an act of measured defiance — a reminder that lasting economic stability is built on deliberate, sometimes unpopular, choices. The new 3 percent target, modest though it may seem, could become the cornerstone of a more disciplined, investor-friendly era for Africa’s most industrialised economy — a quiet revolution in Pretoria that may well echo across the continent.
