Forex expert Bianca Botes of Citadel Global weighs in on the possible effects of inflation targeting on South Africa’s monetary policy, interest rates and rand exchange rates.

A move by the South African Reserve Bank (SARB) and Treasury to lower the country's inflation target could have positive impacts on monetary policy, interest rates, and the strength of the rand, but will need to be handled with care to avoid negative consequences on the local investment climate, according to Citadel Global.

SARB Governor Lesetja Kganyago recently argued for a lower inflation goal, noting that SA’s inflation target is relatively high compared to other emerging markets and advanced economies.

“While the move would likely benefit the broader economy, consumers may see slower rising prices as well as slower wage growth. Businesses, on the other hand, may benefit from slower wage growth and greater economic stability,” Bianca Botes, Director at Citadel Global.

“The move would align South Africa (SA) with global peers who maintain lower inflation goals. This has already boosted the rand to its strongest level against the dollar in the past two months.”

Unpacking what the intervention could mean for businesses and investors, Botes says it is likely that SA will see very careful adjustments to interest rates, a further strengthening of the rand and a stabilising effect on the economy, but if not handled very carefully, it could dampen infrastructure investments, in particular.

INFLATION’S IMPACT ON INTEREST RATES 

“A lower inflation target would likely influence the SARB’s approach to interest rates. While a stricter target might suggest tighter monetary policy to keep inflation low, current analysis suggests that the SARB may not necessarily raise interest rates aggressively,” says Botes.

“Instead, the central bank might adopt a more cautious stance on rate hikes and cuts, focusing on maintaining inflation within the new, narrower target. This could mean more gradual adjustments in interest rates, aiming to balance inflation control with economic growth and employment objectives.”

HOW AN INFLATION SHIFT COULD IMPACT THE RAND 

“The rand’s value is closely linked to inflation and interest rate dynamics. A credible commitment to a lower inflation target could strengthen the rand by boosting investor confidence and improving returns on rand-denominated assets. This was evidenced yesterday when the rand surged upon market optimism about improved monetary policy credibility and economic stability,” says Botes.

BROADER ECONOMIC IMPLICATIONS OF LOWERED INFLATION

“Lower inflation targets tend to reduce inflation expectations, which can moderate wage and price increases, helping to stabilise the economy. Research into SA’s experience with moving the inflation midpoint to 4.5% shows that such shifts can be achieved without sacrificing Gross Domestic Product (GDP) growth or increasing unemployment, provided the central bank maintains clear communication and credibility. This suggests that a further reduction in the inflation target could be managed with minimal economic disruption,” Botes advises.

WARNING OF UNINTENDED CONSEQUENCES ON INVESTMENT GROWTH

“While this move could lead to more cautious interest rate policies and strengthen the rand, it requires balancing inflation control with growth and investment needs. The ultimate impact will depend on the clarity of communication, policy credibility, and the broader economic environment,” Botes cautions.

This comes as the SARB has warned that even a single-point inflation target requires careful calibration to avoid unintended consequences, such as restricting infrastructure investment or economic activity. “The flexibility inherent in the current target range allows for temporary deviations, which might be constrained under a tighter target regime,” says Botes.

BACKGROUND ON SA'S INFLATION TARGETING

Since 2000, SA has operated under an inflation-targeting framework, with a target range of 3% to 6% for headline consumer price inflation. This target is set by the Minister of Finance, Enoch Godongwana, in consultation with the SARB Governor, Lesetja Kganyago and the SARB independently implements monetary policy, primarily through controlling short-term interest rates, to keep inflation within this range. The Monetary Policy Committee has emphasised aiming for the midpoint of 4.5% since 2017, reflecting a more precise inflation goal within the range.