When National Treasury gave the nod to the SARB for the lower 3% inflation target, with a tolerance band of +/-1%, towards the end of 2025, few would have guessed that its first true test would arrive relatively soon after. The onset of the Middle East conflict induced an oil shock that made its way into fuel prices. This led to an inflation spike above the tolerance band in 2026Q2 – up from just before the conflict, when inflation had been sitting at the SARB’s goal. The result was a reversal in policy – from easing to tightening – a development few would have anticipated when the new target was adopted.
A promising start, now under pressure
Looking back, the lower target was adopted in a favourable environment:
- Inflation was on a downward trend towards 3%, while broader economic fundamentals were on the mend thanks to strengthening fiscal discipline, positive credit ratings developments and improving business and consumer sentiment.
- Inflation expectations across multiple horizons started to reflect the news of the lower target. The SARB’s preferred measure, the 2-year-ahead inflation expectations average for professionals, fell to a record low of 3.6% in 2026Q1, about as strong an endorsement as could be hoped for.
Since then, inflation expectations have reversed course, rising to 4.2% 1 year ahead and 3.9% 2 years ahead (see Figure 1). This is a stark reminder that expectations are not yet firmly anchored, and that the SARB cannot rest on its laurels. The public needs convincing that the target will be reached.
Lessons from the past
Large external shocks have tested South Africa’s resolve before. In the early 2000s, an emerging market crisis triggered a rand sell-off and a subsequent inflation spike, forcing National Treasury to walk back its intention to lower the target to 3% – 5% over time. This time, the SARB has been explicit that there will be no wavering. Beyond this resolve, the central bank will need to show what it is prepared to do to deliver on the new target in practice. Target abandonment is highly unlikely; the real question is what form the defence takes under a live shock, and there the SARB’s credibility is yet to be demonstrated.
The case for vigilance
In a highly fluid environment, a data-dependent central bank facing a fast moving shock is forced to act on incomplete information – meaning it may need to raise rates before the data fully confirms the need to, rather than waiting for certainty.
Another reason for vigilance is that shocks rarely arrive in isolation. Were expectations firmly anchored at the new target, the central bank might look through a single shock. But this target is still in its infancy, and a successive shock (such as an El Niño induced food shock) landing on already elevated expectations risks compounding in a way the first shock alone would not.
The danger beneath the average
Averages tend to mask underlying divergence. While average expectations for the year ahead did jump, analysts still see inflation returning close to target over the medium term, while businesses and trade unions expect a protracted target breach – and households sit meaningfully higher than both. Historically, when inflation has risen, disagreement about where it will land has risen with it (see Figure 1). It is in this dispersion that the danger lurks: when expectations become widely spread out, even if the average remains moderate, those with elevated expectations may act on them, increasing the risk of broader price pressures taking hold.
One factor that provides some comfort: Wage growth expectations have remained stable at 4% – 5%, despite rising inflation expectations – likely reflecting a weak labour market. This limits the risk of a wage price spiral and the pressures that typically follow. However, wage expectations remain above the 3% target and haven’t tracked inflation expectations lower since the adoption of the new target, meaning they too will need to anchor closer to target over time.
A test of credibility
This shock will pass, like the ones before it. What it will reveal is whether the SARB is truly committed to the target and willing to take necessary, even unpopular, action to defend it and protect its credibility. The market’s reaction to the initial announcement of the lower target was telling: a lower inflation environment, and the lower inflation risk premium associated with it, has clear benefits. A sustained commitment to that low inflation environment, backed by a SARB that demonstrates its resolve, can only add to a positive backdrop for domestic assets in the long run.
