Why Lowering South Africa’s Inflation Target May Support Growth

This economic note is based on a working paper published by the authors. For a deeper dive into the research, see Working Paper 922 . In recent years, South Africa’s inflation target has moved from being a technical monetary policy detail to the centre of an important public debate. Between 2023 and 2025, discussions between the South African Reserve Bank (SARB) and the National Treasury focused on whether the country should lower its long-standing inflation target range of 3–6 per cent to a point target of 3 per cent. A natural question followed: would a lower inflation target help or hurt the economy? New evidence suggests that, if done credibly, lowering the inflation target can support economic growth over the medium term—without imposing large or lasting costs in the short run. The analysis draws on South African data since the introduction of inflation targeting in 2000 and examines how the economy responds when the inflation target is credibly lowered. Rather than focusing on policy announcements alone, it looks at changes in medium-term inflation expectations, which reflect what households, firms, and investors believe inflation will be over the longer run. When a central bank is credible, these expectations effectively reveal the inflation target the public believes in. The first concern often raised about lowering inflation is the risk of weaker growth. In the short run, tighter monetary conditions can reduce economic activity—a cost economists refer to as the “sacrifice ratio.” The evidence for South Africa does show a small initial slowdown when the inflation target is reduced. However, this effect is modest and short-lived. After about a year, economic output begins to rise, peaking at roughly 1.2 per cent above its previous path after two years, and remaining higher for several years. In net terms, the economy ends up stronger, not weaker. Lowering the inflation target also delivers what it promises: lower inflation. Both inflation expectations an