“The tolerance band of 1 percentage point either side of 3% does not mean we will be indifferent to inflation anywhere between 2% and 4%. We want to be at 3%.”
With this clarification, South African Reserve Bank Governor Lesetja Kganyago (pictured) moved to anchor expectations around the country’s newly established inflation target, announced on 12 November by Finance Minister Enoch Godongwana.
Kganyago made the remarks on 20 November, shortly after the Monetary Policy Committee (MPC) unanimously decided to cut the repo rate by 25 basis points to 6.75%, citing an improved inflation outlook.
He noted that the shift from a range of 3% to 6% to 3% target, with a 1-percentage-point tolerance band, marked a material evolution in the country’s monetary framework. Although the band provides flexibility, he said the central bank remains firmly committed to the objective.
Kganyago said the new framework should not be interpreted as giving SARB latitude to treat any outcome between 2% and 4% as equally desirable. Instead, he emphasised that the bank’s policy stance, forecasts, and communication will consistently orient towards the 3% target. However, he cautioned that “no central bank has the tools to deliver inflation at an exact point all the time”.
As a flexible inflation-targeting institution, the SARB recognises that attempting to counter every price shock could result in destabilising swings in output.
To support transparency, Kganyago said the bank intends to explain clearly when inflation deviates from target and what drivers are responsible.
“Most of the time, we should be expected to keep inflation within the tolerance band, with breaches occurring only when there are severe shocks. We will always be setting policy so that inflation is going back to 3%.”
Because monetary policy acts with a lag, typically over 12 to 24 months, the 3% target takes effect immediately but will be reached steadily over the forecast horizon.
The governor added that, with inflation subsiding, the SARB’s Quarterly Projection Model continues to anticipate gradual rate cuts, although all decisions will remain data-dependent and taken “on a meeting-by-meeting basis”.
Background to the new target
In his Medium-Term Budget Policy Statement, Godongwana announced that the 3% target with a 1-percentage-point tolerance band would replace the long-standing 3% to 6% range, marking the first change in 25 years. He said the decision followed agreement between himself and the governor, as well as consultations with President Cyril Ramaphosa and Cabinet.
Read: Treasury: 3% inflation target will improve competitiveness but squeeze short-term revenues
Treasury argued that the lower target is expected to reduce inflation expectations and, over time, inflation itself – creating space for lower interest rates, stronger investment and improved economic growth.
Although the initial adjustment is expected to slow nominal GDP growth and place pressure on revenue targets, Treasury maintained that the long-term benefits outweigh the short-term fiscal constraints.
The MTBPS noted that joint research undertaken with the SARB, together with international evidence on inflation targeting in emerging markets, supported a lower and more precise target.
South Africa’s inflation rate is structurally higher than that of its trading partners, eroding competitiveness and contributing to rand depreciation. A lower target, Treasury argued, aligns the country with international best practice and reduces the inflation risk premium demanded by investors.
Criticism and concerns about fiscal implications
Business Day reported that the shift drew criticism from civil-society organisations and several economists during hearings in Parliament.
Representatives from Wits University’s Public Economy Project (PEP), the Budget Justice Coalition, the Alternative Information and Development Centre, and the Institute for Economic Justice argued that the lower target entrenches what they view as an austerity-driven fiscal stance that undermines service delivery.
Economists warned that targeting 3% inflation could weaken government revenue and exacerbate pressures on indebted households.
According to Business Day, PEP economist Rashaad Amra told MPs that “lower inflation has sharply reduced nominal GDP, which in turn weakens revenue, worsens debt ratios, and forces deeper expenditure compression – even as real economic activity remains broadly unchanged. Monetary policy, not fiscal behaviour, is responsible for the deterioration in the fiscal outlook.” He called on Parliament to require Treasury to report on the co-ordination between monetary and fiscal policy.
Critics also argued that bondholders and financial institutions tend to benefit from lower inflation, whereas households with significant debt burdens suffer from slower nominal wage growth – eroding disposable income and reducing VAT receipts.
Godongwana, however, reiterated that a lower inflation target reduces the cost of living and borrowing, ultimately supporting long-term economic growth and job creation.
Treasury acknowledged the short-term impacts on fiscal metrics but maintained that the long-run gains justify the adjustment.
