Macroeconomic Effects of a Potential Change in South Africa’s Inflation Target: South Africa

South Africa’s inflation-targeting framework has served the country well, playing a key role in reducing inflation since 2000.
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Volume/Issue: Volume 2025 Issue 025
Publication date: March 2025
ISBN: 9798229006385
$15.00
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Summary

South Africa’s inflation-targeting framework has served the country well, playing a key role in reducing inflation since 2000. However, with inflation still above that of key trading partners, questions have arisen whether a potential shift from the current target band (3 to 6 percent) to a lower point target could better support macroeconomic stability over the medium term. This chapter explores the macroeconomic implications of such a shift. While medium run gains result from lower borrowing costs, the modeling analysis points to the critical role of inflation expectations and central bank credibility in minimizing near-term output costs; fiscal-monetary interactions are also important. A review of select case studies highlights the importance of close coordination among policymakers, clear communication, and gradual transitions to support the achievement of lower inflation.