A weaker dollar could lower South Africa’s import costs, especially oil, which affects everything from fuel prices to transport tariffs.
South Africa is on the cusp of a quiet, but profound, policy revolution, one that will probably not dominate headlines, but could change the cost of living, investment climate and policy credibility for years to come.
The South African Reserve Bank is preparing to reset the country’s inflation target, narrowing it from the traditional 3% to 6% band to a firm 3% anchor.
In May 2025, inflation fell to 2.8%, its fourth consecutive month below the lower bound of the current target. With inflation subdued, the Reserve Bank has not only cut the repo rate to 7.25% but is also strongly signaling that a tighter target could offer greater stability, clarity and long-term growth prospects.
This shift is not just academic. It would affect household budgets, food prices, interest rates, job creation, government debt and even South Africa’s credibility in global markets. With inflation globally easing, and trading partners adjusting their own macroeconomic targets, the time is ripe for South Africa to follow suit.
The current 3% to 6% target band was introduced in the early 2000s when South Africa was grappling with higher inflation volatility and external shocks. But, today, the inflation landscape has changed:
Headline CPI has consistently remained below the 4.5% midpoint for the past year and recently fell under 3%. Core inflation, a better measure of persistent pressures, also dropped to 3.0%, suggesting deeper disinflation. With fuel and food prices stabilising, and the rand holding steady, the reserve bank has a rare opportunity to re-anchor inflation expectations at a lower and more credible level.
A firmer inflation target provides clarity to markets, businesses and consumers. It helps reduce long-term borrowing costs, improves policy predictability and enhances investor confidence.
South Africa’s trade and investment flows are deeply influenced by the policies of its largest global partners, all of whom are recalibrating inflation expectations in a post-pandemic world.
The US Federal Reserve is expected to begin cutting interest rates by Q3 2025, after inflation fell close to its 2% target. A weaker dollar could lower South Africa’s import costs, especially oil, which affects everything from fuel prices to transport tariffs.
The European Central Bank began its first rate cuts in June 2025, with inflation now hovering around 2.3%. As the EU is South Africa’s top trading partner, stable prices in Europe support South African exports (cars, fruit, metals) and reduce price instability on imports.
China faces an opposite problem: deflation. With consumer prices rising just 0.7%, its stimulus measures are designed to boost demand. This could temporarily reduce prices for South African imports, like electronics and machinery, but it could also dampen demand for key exports such as coal and iron ore.
While inflation remains volatile in countries like Nigeria and Ghana, South Africa’s ability to target and sustain a low rate would position it as a regional anchor of stability attracting investment and strengthening its voice in Africa’s financial future.
While discussions about inflation targets might seem removed from everyday realities, the effects of this policy will touch every household, small business and worker in South Africa. Here’s how.
When inflation is high, the prices of essentials like bread, maize meal, oil and meat often rise uncontrollably. A firm 3% anchor can slow these increases. This translates to more predictable household budgets and less pressure on working-class families.
“At 3% inflation, a typical R500 grocery basket would increase by just R15 a month, far less than the R40 to R50 jumps seen in high-inflation periods,” notes economist Reitumetse Mofokeng.
Stable inflation contributes to a stronger rand and lower fuel price volatility. For taxi users, truckers and rural commuters, this means fewer fare hikes and transport cost spikes, a key driver of inflation for poor households.
Lower inflation usually leads to lower interest rates. Over time, a 3% anchor could bring mortgage and car loan rates down. A R1 million home loan at 11.5% costs about R10 600 a month. At 9.5% (if inflation stabilises), that drops to R9 000 a month, a saving of R1 600 a month.
That’s money in the pocket for middle-income families struggling with high debt burdens.
When inflation is under control, businesses can plan better, borrow more affordably and take investment risks. This spurs new hiring, especially in construction, retail and agriculture.
Predictable prices are oxygen for township entrepreneurs,” says Khanyisa Nxumalo, a Sowet bakery owner. “You can’t hire if you don’t know your costs next month.”
Stable inflation helps workers negotiate real wage increases. In a high-inflation environment, a 6% raise barely covers the cost of living. At 3%, the same raise leaves workers with more take-home value.
Despite its benefits, a 3% target isn’t a cure-all. It must be managed carefully or it could backfire. If implemented too quickly, it could strengthen the rand too much, hurting export competitiveness. If productivity doesn’t improve, South African goods might become too expensive globally. If fiscal discipline falters, inflation expectations could rise again, undermining the Reserve Bank’s credibility.
This is why the bank insists that it needs the treasury’s backing for the shift and that the transition must be gradual, well-communicated and credible.
Looking ahead: What South Africans should watch
| What to watch | Why it matters |
| July 2025 MPC Minutes | Could signal formal move to 3% |
| The treasury | Finance minister must endorse the change |
| Rand stability | Key to keeping import prices and inflation down |
| Repo rate forecasts | Declining rates signal confidence in the anchor |
| BER inflation expectations survey | Shows if businesses and consumers are buying into the new framework |
For too long, high and volatile inflation has eaten into the incomes of poor and middle-class South Africans, discouraged savings and stifled investment. A firm 3% anchor is a bold policy pivot, one that aligns South Africa with global norms, encourages responsible governance and offers tangible relief for citizens.
This is not just about economic theory. It’s about bringing down the cost of living, unlocking credit, stabilising food and fuel prices and creating a more investable South Africa.
And, if executed with the clarity and discipline that the Reserve Bank is known for, this could mark the beginning of a new macroeconomic era, one of price stability, public trust and economic inclusion.
Anchoring at 3% won’t fix everything. But it’s one strong, steady hand on the wheel — exactly what this country needs right now.
Nkosinathi Mtshali is a bachelor of laws student at University of the Free State.