South Africa's 3% inflation target

The South African Reserve Bank believes we must take advantage of the current lower levels of inflation and has announced that it will now interpret its mandate as targeting 3%. This has been met with mixed responses. Sandy McGregor provides some context on the origins of inflation targeting and explains why a lower target has many positive benefits.

The origins of inflation targeting
Public policy evolves in response to past experience. A significant cause of the rampant inflation that plagued the 1970s was a long period during which interest rates were too low. After inflation was crushed in developed economies by high interest rates in the early 1980s, some argued that rates were too high and had an unnecessarily adverse impact on economic growth. Inflation targeting is predicated on the idea that between these extremes, there is an interest rate that allows for an optimal combination of price stability and economic growth. This is now known as the neutral rate. A consensus has developed that the objective of monetary policy should be to use interest rates to direct the economy towards that optimal combination.

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August 22 2025 By Sandy McGregor - Allan Gray