Less risk and more reward: revising South Africa's inflation target

South Africa’s inflation target is an outlier when compared with peer emerging markets and major trading partners. The high and wide inflation target keeps long-term inflation risks higher than they need to be, depressing economic growth and deepening inequality. A lower inflation target creates better macroeconomic outcomes by reducing inflation and borrowing costs and improving the transmission of policy, indirectly generating both macroeconomic stability and growth gains. This paper looks at how a 3% point inflation target strengthens the macroeconomic framework and sets off a positive interaction of critical macroeconomic drivers, enabling South Africa to harness significant, permanent and broad-based benefits from lower inflation. We model a lower inflation point target through the SARB’s quarterly projection model and an enhanced version of its core macroeconometric model to assess the macroeconomic, growth, fiscal and distributional implications.