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Investments
Lower Inflation Target: What it means for investors
South Africa’s 3% inflation target: What it means for investors
Mpho Molopyane: Chief Economist
Sifiso Mkwanazi Economist
Mandisa Zavala Head of Asset Allocation
Gontse Sekhitla Head of Investment Actuarial
Executive summary South Africa continues to transition toward a structurally lower inflation environment since adopting an inflation-targeting framework in 2000, initially setting a band of 3-6%. For many years, inflation hovered near the upper end of that range. In 2017, the South African Reserve Bank (SARB) shifted its focus to the 4.5% midpoint and again to 3% as of July 2025. This move was recently endorsed by the Minister of Finance, who set the target at 3% with a 1 percentage point tolerance band. This brings South Africa in line with global norms, where most emerging and advanced economies aim for inflation between 2% and 3%.
Historically, South Africa’s inflation averaged 5.5% from 2000 to 2024 – well above its trading partners. This gap contributed to persistently high interest rates, weaker competitiveness and pressure on the exchange rate. The good news? Achieving 3% is within reach: recent inflation has averaged 3.1%. However, structural challenges remain. Administered prices, such as electricity, water and insurance, continue to rise faster than the target, meaning non-administered inflation must fall below 3% to compensate. The SARB’s strong credibility will help anchor expectations and guide headline inflation lower. Still, Brazil’s experience reminds us that fiscal and monetary policy must work hand in hand, and resilience to global shocks may require decisive rate hikes to maintain credibility.
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What does this mean for investors? A lower inflation target points to a future of reduced interest rates, less volatility and improved competitiveness. Benefits could include a more stable currency, lower bond yields and improved asset valuations. Nevertheless, risks remain – administered price hikes, fiscal slippage and global shocks could derail progress. For portfolios, the implications are significant. Lower inflation reduces long-term expected returns across asset classes, making it harder to meet CPI+ targets. This may require a greater allocation to growth assets to maintain the probability of achieving those hurdles. In extreme cases, CPI+ targets themselves may need to be revisited. Pension fund trustees and financial advisers will need to reassess return and income assumptions in light of this new inflation reality.