Inflation targeting and the dynamics of inflation risk premia in South Africa’s bond market (WP/26/09)

Inflation targeting and the dynamics of inflation risk premia in SA bond market Using a Fisher‑equation-based decomposition, we extract the inflation risk premium from expected inflation, real yields and liquidity premia, focusing on the five‑year maturity. Inflation risk premia are estimated from July 2011 to December 2024, the period when the South African Reserve Bank (SARB) targeted the full 3–6% inflation band and subsequently shifted towards an explicit midpoint. We employ a combination of ordinary least squares regressions and autoregressive distributed lag models to identify both static and dynamic relationships. The results indicate that while the target change itself has no strong direct effect, inflation expectations anchor the inflation risk premium in the long run. Short‑run fluctuations are driven primarily by inflation surprises and tail‑risk events. These findings imply that a sustained decline in inflation expectations following the move to a 3% inflation target could be another factor that supports lower nominal yields through a reduced inflation risk premium.