Cape town: In a landmark moment for South Africa’s monetary policy agenda, the government has decided to reduce the country’s inflation target to 3%, with a 1 percentage point tolerance band. This strategic move is expected to lower the cost of living and borrowing for households, businesses, and the government, thereby supporting higher long-term economic growth and job creation.

According to South African Government News Agency, the announcement was made by the Minister of Finance, Enoch Godongwana, during the presentation of the Medium-Term Budget Policy Statement at the National Assembly’s Good Hope Chamber in Parliament. The Minister noted that the 1 percentage point band provides flexibility to accommodate any unexpected inflationary shocks. This new target immediately replaces the previous target range of between 3% and 6% and will be implemented over the next two years.

The revised target aligns with South Africa’s flexible approach to inflation targeting, which focuses on looking beyond short-term deviations. The Reserve Bank will pursue the target on a continuous basis, ensuring transparent communication regarding any deviations. Over time, the lower target is expected to decrease inflation expectations, creating room for lower interest rates.

While the Minister acknowledged that the short-term fiscal costs of a lower target include reduced nominal Gross Domestic Product and revenue growth, he emphasized that the long-term benefits outweigh these costs. The lower target aligns South Africa with international best practices and reduces the inflation risk premium that investors demand, making borrowing cheaper.

The Minister of Finance and the Governor of the Reserve Bank will work closely to coordinate policy settings, maximizing the economic benefits of the new target and enhancing the alignment of fiscal and monetary policies.