Twenty-five years of inflation targeting and the new inflation target

Policy Paper 55 This paper reviews South Africa’s experience with inflation targeting since its adoption in 2000 as the South African Reserve Bank (SARB) enters a new era, switching to a 3 percent target. The literature broadly concludes that the framework has succeeded in lowering inflation, reducing its volatility, and strengthening the credibility and transparency of the SARB. Empirical evidence shows declines in inflation persistence, a flattening of the Phillips curve, and a reduction in exchange rate pass-through over time, alongside a clearer and more rules-based monetary policy stance. This is an indication of well anchored inflation expectations which is vital for the credibility of the institutions. However, the review also highlights persistent structural constraints—high unemployment, weak potential growth, fiscal instability, and deep inequality—that have limited the broader developmental impact of the framework. Critics argue that inflation targeting may constrain policy space, though evidence suggests that these socioeconomic outcomes largely reflect structural rather than monetary factors. The paper concludes by examining current debates on lowering the inflation target and shows that future gains depend critically on fiscal coordination and progress on structural reforms, rather than on monetary policy adjustments alone. Keywords: Inflation targeting, Monetary policy, credibility, structural challenges, South Africa