South Africa’s 3% inflation target: What it means for investors
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.
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.
Mpho Molopyane: Chief Economist
Sifiso Mkwanazi Economist Mandisa Zavala Head of Asset Allocation
Gontse Sekhitla Head of Investment Actuarial
Policy background: How South Africa’s inflation target evolved
South Africa’s move toward a low-inflation environment has been shaped largely by its monetary policy framework. Back in 2000, the country adopted an inflation-targeting regime, setting a headline range of 3%-6%. In the early years, particularly between 2009 and 2017, there was bias toward the upper end of the band, with inflation averaging 5.6%.
A turning point came in July 2017, when the SARB announced its intention to focus on the 4.5% midpoint. Fast forward to July 2025, and the Monetary Policy Committee (MPC) expressed a preference for inflation to settle at 3%1. This shift was formally endorsed by the Minister of Finance during the November Medium-Term Budget Policy Statement (MTBPS), confirming a new target of 3%, with a ±1 percentage point tolerance band.
Figure 1: Evolution of monetary policy framework in South Africa
Why 3%? The case for a lower inflation target
The SARB has long argued that the previous 3%-6% target was higher than those of comparable emerging markets and key trading partners. Since the initial adoption of inflation targeting in the late 1990s and early 2000s, most economies have steadily lowered their inflation targets. South Africa, however, kept its band unchanged for decades (see Figures 1a and 1b).
This gap had real consequences. South Africa’s inflation consistently exceeded that of its trading partners (Figure 1c), creating a high interest rate environment that discouraged investment. Faster price increases relative to global peers eroded competitiveness, while persistent inflation differentials placed ongoing pressure on the rand.
Figure 1a: Initial inflation target at adoption
Figure 1c: Select trading partner inflation
Figure 1b: Current inflation target
*South Africa’s target before the formal adoption of the 3% target. Sources: SARB, IMF and Alexander Forbes Investments
Can the SARB deliver on the 3% target?
One of the most common questions from clients is whether 3% inflation is truly attainable, even though inflation has averaged 3.1% over the past 12 months. Achieving this level on a sustained basis, however, comes with challenges. Chief among them are administered prices, such as electricity and water tariffs, and insurance costs, which have historically exceeded the inflation target (see Figures 2a-2c). These persistent increases exert upward pressure on overall inflation, meaning non-administered prices would need to fall below 3% to offset the impact.
Despite these headwinds, the SARB has a strong track record of delivering on its objectives. When the SARB shifted its focus to the 4.5% midpoint in 2017, both headline and core inflation improved significantly. Between 2009 and 2017, headline inflation averaged 5.6% and core inflation 5.1%. After the shift, from 2018 to 2024, these averages dropped to 4.8% and 4.0%, respectively (see Figure 2d). This progress came despite continued above-target administered prices and external shocks from fuel and food costs. Inflation expectations also moved lower, from 5.6% in 2009–2017 to 4.8% in 2018-2024, underscoring the SARB’s credibility in guiding inflation down.
Figure 2a: Administered price inflation
Figure 2b: Utility tariffs
Figure 2d: Inflation trends post the move to 4.5%
Lessons from Brazil’s inflation targeting experience
A common concern among clients is whether a 3% inflation target is realistic for a small, open economy like South Africa. The worry is that achieving such a low target could require aggressive monetary tightening, especially in the face of external shocks and structural challenges2. Brazil’s experience offers valuable lessons.
Brazil adopted inflation targeting in 1999, starting with relatively high targets, 8%, 6% and 4% for 1999, 2000 and 2001, each with a ±2% tolerance band. While the target was met in the first two years, inflation breached the band between 2001 and 2003 due to sharp currency depreciation, steep increases in administered prices (particularly electricity tariffs) and surging energy costs. In response, Brazil’s central bank raised interest rates aggressively and authorities revised targets upward for 2003 and 2004. From 2005, the target was lowered to 4.5% with a ±2.5% tolerance band.
Challenges resurfaced between 2013 and 2016, when fiscal pressures led to increases in public tariffs and regulatory taxes. Combined with another bout of currency weakness and rising administered prices –these factors pushed inflation higher. The central bank responded with another round of sharp rate hikes. Once inflation stabilised, authorities announced a gradual reduction of the target – from 4.5% to 3%over six years, keeping to the glide path even through the post-pandemic inflation surge.
The Brazilian experience underscores two critical lessons. First, fiscal and monetary policy must work in tandem – fiscal pressures such as higher consumption taxes and administered prices can undermine disinflation efforts. Second, external shocks and steep currency depreciation can derail progress, requiring decisive rate hikes to maintain credibility and prevent inflation expectations from becoming unanchored.
2 https://www.imf.org/en/publications/selected-issues-papers/issues/2025/03/28/macroeconomic-effects-of-a-potential-change-in-south-africas-inflation-target-south-africa-565691
Figure 3a: Brazil’s consumer inflation
Figure 3b: Brazil’s inflation and policy rate
Sources: Bloomberg and Alexander Forbes Investments
Monetary policy outlook: What to expect
One of the most common misconceptions about the lower inflation target is that the SARB will need to tighten monetary policy to guide inflation and expectations down to 3%, at the expense of growth. In our discussions with stakeholders, we have argued the opposite: the risks are tilted toward rate cuts rather than hikes. This is because disinflation is already underway, with headline inflation hovering near 3%. The real repo rate – calculated as the nominal repo rate minus inflation – shows that policy is already tight by historical standards. At 3.4% in October, the real repo rate is well above the SARB’s own estimate of the neutral rate (2.8%), the level at which policy is neither restrictive nor expansionary (Figure 4).
The inflation and interest rate outlook suggests that the real policy rate likely peaked at 5.2% in October 2024. This implies that we have passed peak monetary restrictiveness in this cycle and the economy should benefit as both nominal and real rates decline. According to the SARB’s Quarterly Projection Model (QPM), inflation is expected to average 3.3%, 3.5% and 3.1% in 2025, 2026 and 2027, respectively. The repo rate is projected to decrease to 5.99% by the end of 2027 – around 75 basis points lower than current levels and below where it would have been, had the target remained at 4.5%.
Figure 4: Real repo rate
These forecasts align closely with our own and with consensus estimates (Figures 5a and 5b). On the upside, a reduction in the country’s risk premium – lowering the neutral real interest rate from 2.8% to 2.5% – could see the nominal repo rate settle at 5.5%, a full 125 basis points below current levels. On the downside, steep currency depreciation, sharp increases in administered prices, or climate-related shocks driving food prices higher could be inflationary, forcing the SARB to tighten policy to keep inflation expectations anchored.
Market impact: How a lower inflation target shapes assets
A lower inflation target has far-reaching implications across asset classes. If the SARB succeeds in anchoring inflation at 3%, the result could be a structural shift toward permanently lower interest rates, reduced inflation volatility and improved competitiveness relative to peers and key trading partners. Over the medium- to long-term narrower inflation differentials would support a more stable rand.
Lower inflation would also benefit bond valuations as yields compress. Domestic equities stand to gain from lower discount rates, while the property sector could benefit from reduced borrowing costs (Table 1). Some of these effects are already visible. Since the July MPC meeting, when the SARB announced its tilt toward the new target, nominal and inflation-linked bond yields have fallen by 100 and 65 basis points, respectively, while the rand strengthened by 6.6% against the US dollar by Friday, 14 November (Figures 6a and 6b). Expected declines in inflation and interest rates should support further gains.
The caveat is that external shocks, political uncertainty or disappointing fiscal consolidation could curb these benefits, reminding investors that the path to lower inflation is not without risks.
Fixed Interest
SA nominal bonds: SARB’s modelling shows a 1.5 percentage point (ppt) reduction in inflation leads to a 1.2ppt compression in the 10-year bond yield. The market reaction since the July 2025 MPC statement suggests some of this has already occurred.
SA inflation-linked bonds: Lower inflation risk would be supportive of lower real yields.
SA cash: Low interest rates would reduce yields on cash instruments in line with bonds.
Source: Alexander Forbes Investments
Growth assets & exchange rate
SA equities: Lower borrowing costs for households and businesses would be supportive of growth and is generally positive for equities, while lower bond yields would also enhance equity valuations.
SA property: Low interest rates improve affordability, which will be supportive of demand for property. This makes property an attractive investment.
Exchange rate: A lower inflation environment would reduce inflation differentials between SA and the US and as per Purchasing Power Parity (PPP) theory, it would reduce the currency depreciation to about 1% per year.
Figure 5a: Inflation outlook
Figure 5b: Repo rate outlook
Sources: SARB, Stats SA and Alexander Forbes Investments
Table 1: Implication of the lower inflation target on asset classes over medium- to long-term
Questions investors are asking
Will interest rates begin to adjust lower as inflation stabilises?
What does this mean for retirement sustainability?
How will lower inflation affect long-term returns?
Do investment strategies need to adapt to meet CPI+ targets?
How are investment managers positioning portfolios for this new environment?
Key considerations for pension funds, trustees and financial advisers
A lower inflation environment introduces important challenges for retirement portfolios. For defined contribution (DC) funds, which often target CPI+ returns, the probability of meeting these targets may decline – particularly for portfolios heavily weighted toward bonds and cash, as yields are expected to fall. To maintain the likelihood of achieving CPI+ hurdle rates, funds may need to increase allocations to growth assets where higher long-term returns are more attainable, albeit with increased volatility. In extreme cases, a revision of CPI+ targets could become necessary.
Offshore positioning may also adjust at the margin. As expected, real returns in rand terms will moderate with a narrowing of the currency depreciation differentials, therefore, the return advantage of offshore assets may soften somewhat. However, the continued diversification
benefits of global exposure remain relevant, suggesting no material change to offshore allocations.
For defined benefit (DB) funds, lower nominal yields raise the present value of liabilities, putting pressure on funding ratios. However, falling yields benefit fixed income holdings and gains in equities could partially offset the strain. DB funds employing Liability Driven Investment (LDI) strategies may be better positioned, as these portfolios move in tandem with liabilities when yields decline.
Ultimately, pension fund trustees and financial advisers will need to reassess retirement projections. The shift to a 3% inflation target changes the inflation outlook and underlying market return assumptions, requiring a reassessment of portfolio structures and drawdown strategies.
Figure 6a: SA’s generic 10-year bond yield
Figure 6b: USD/ZAR
Sources: Bloomberg and Alexander Forbes Investments
Conclusions
Over the medium- to long-term, moving to a 3% inflation environment promises several benefits: lower risk premiums, reduced borrowing costs for households and businesses and alignment with international standards. This shift should also be supportive of growth.
In practical terms, we expect the repo rate to settle between 5.5% and 6% – around 100 to 150 basis points lower than it would have been under the previous target. Lower inflation should also compress bond yields, improve valuations and provide a tailwind for domestic equities and property through lower discount rates. Narrower inflation differentials relative to trading partners will further support currency stability.
For pension fund trustees and financial advisers, understanding the impact on return assumptions and income projections will be critical. The new target changes the inflation outlook and, by extension, portfolio dynamics, requiring careful reassessment of strategies and drawdown rates.
Finally, the Finance Minister’s endorsement of the lower target alleviates concerns about fiscal-monetary misalignment and strengthens the credibility of disinflationary goals. That said, the transition to sustained 3% inflation will not be without challenges. Sharp increases in administered prices, external shocks, political uncertainty or weak fiscal consolidation could offset some of the anticipated benefits. Investors should remain vigilant and ensure portfolios include strategies to hedge against tail risks.
At Alexforbes, we remain committed to building portfolios designed to adapt to shifting conditions, endure the full cycle of market dynamics and deliver long-term value. We believe that clarity of purpose, disciplined portfolio construction and purposeful diversification are essential to navigating a lower inflation environment with resilience and confidence.
WithAlexforbes,nomatteryourdestination,you’reintherightplace.
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If you would like to further discuss how we are positioning portfolios and what this change means for your investment strategy or retirement goals, please contact your Alexforbes consultant.
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