Selected Issues Papers

Macroeconomic Effects of a Potential Change in South Africa’s Inflation Target: South Africa

By Jana Bricco, Mario Mansilla, Philippe Wingender

March 31, 2025

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Jana Bricco, Mario Mansilla, and Philippe Wingender. "Macroeconomic Effects of a Potential Change in South Africa’s Inflation Target: South Africa", Selected Issues Papers 2025, 025 (2025), accessed April 1, 2025, https://doi.org/10.5089/9798229006385.018

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Summary

South Africa’s inflation-targeting framework has served the country well, playing a key role in reducing inflation since 2000. However, with inflation still above that of key trading partners, questions have arisen whether a potential shift from the current target band (3 to 6 percent) to a lower point target could better support macroeconomic stability over the medium term. This chapter explores the macroeconomic implications of such a shift. While medium run gains result from lower borrowing costs, the modeling analysis points to the critical role of inflation expectations and central bank credibility in minimizing near-term output costs; fiscal-monetary interactions are also important. A review of select case studies highlights the importance of close coordination among policymakers, clear communication, and gradual transitions to support the achievement of lower inflation.

Subject: Cross country analysis, Emerging and frontier financial markets, Exchange rate pass-through, Financial markets, Financial services, Fiscal consolidation, Fiscal policy, Foreign exchange, Inflation, Inflation targeting, Interest rate parity, Monetary policy, Monetary policy frameworks, Price stabilization, Prices, Real interest rates

Keywords: Central Bank Credibility, Emerging and frontier financial markets, Exchange rate pass-through, Fiscal consolidation, Inflation, Inflation Expectations, Inflation targeting, Inflation Targeting, Interest rate parity, Monetary Policy, Monetary policy frameworks, Price stabilization, Public debt, Real interest rates, Return on investment, Sacrifice Ratio, South Africa

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