## Macroeconomic Effects of Lowering South Africa’s Inflation Target

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### Introduction
- Policy change considered: lowering South Africa’s inflation target from the midpoint 4.5 percent to the lower bound 3 percent.
- Observed developments around the SARB announcement:
  - Inflation averaged 3.1 percent in the first half of 2025.
  - Two-year ahead inflation expectations reached 4.2 percent in July 2025.
- Central trade-offs:
  - Low and stable inflation → higher confidence, higher growth, stronger purchasing power (benefitting the poor), lower inflation premia, reduced exchange rate pressures/volatility.
  - Achieving lower expectations typically requires a tighter monetary stance → near-term output and employment costs (the “sacrifice ratio”).
  - Costs depend critically on central bank credibility and the forward-looking nature of expectations.

### Context: South Africa’s Inflation Targeting Experience
- Key facts and timeline:
  - IT introduced in 2000 with a 3–6 percent band.
  - Planned narrowing to 3–5 percent in 2004–05 abandoned after 2001 shocks and subsequent inflation accelerations (including 2008 commodity price surge).
  - Between 2011–17 inflation hovered around the upper end of the target range.
  - Post-pandemic tightening during 2021–23; inflation declined to 4.4 percent in 2024.
  - SARB’s July 2025 statement favored a 3 percent target.
- Reviews and assessments:
  - Honohan and Orphanides 2022; National Treasury 2024: IT successful in anchoring expectations but wide band contributed to higher inflation risk premia.
  - Independent Review recommended moving to an explicit point target of 3 percent.
  - Alternative views: Hall (2025) suggests theoretical zero-inflation but practical 2–3 percent; Burger (2025) suggests range 1.5–4.5 percent with midpoint 3 percent.
- International parallels:
  - Early adopters (Canada, UK): point targets (2.5 to 2 percent) with narrow bands.
  - Czech Republic: 4.5 percent (+/- 1 percent) in 2000 → 2 percent (+/- 1 percent) by 2010.
  - Emerging markets (Indonesia, Philippines, Brazil) reduced targets from 5–8 percent to 2.5–3 percent.

### Modeling Framework (GIMF) and South Africa Calibration
- Model description:
  - IMF’s Global Integrated Monetary and Fiscal Model (GIMF): multi-region DSGE with micro-founded households and firms, nominal and real rigidities, bilateral trade in intermediate, investment, and consumption goods.
  - Monetary policy: inflation-targeting calibrated Taylor rule.
  - Fiscal policy: adjusts tax rates, expenditures, and transfers to stabilize debt and provide countercyclical support; keeps debt on a constant path via a fiscal deficit target.
- Key assumptions and features:
  - Households: two groups — (i) overlapping generation (OLG) households; (ii) liquidity-constrained households (consume all income each period). Share of liquidity-constrained households = 60 percent.
  - Firms: monopolistic competition, Cobb-Douglas technology, nominal rigidities, real adjustment costs on investment, financial accelerator per Bernanke, Gertler, and Gilchrist (1999).
  - Trade: bilateral modeling responsive to demand, supply, terms of trade, and real exchange rates.
- South Africa-specific calibrations:
  - Phillips curve quarterly slope = 0.25.
  - Higher markups in domestic goods markets than advanced economy baseline.
  - Sectoral coverage: tradables and non-tradables — agriculture, mining, manufacturing, services.
- Data sources referenced for calibration:
  - OECD Inter-Country Input-Output Database (2023).
  - IMF’s Government Finance Statistics database.

### Scenario Design and Expectations Specifications
- Scenarios simulated: lowering the inflation target from 4.5 to 3 percent with variations in:
  - Inflation expectations formation/credibility: "fully forward-looking", "rapidly-adapting" (GIMF baseline), "gradual learning".
  - Sensitivity of inflation risk premia: simulated UIP exogenous premium reductions.
  - Fiscal responses: including spending-based fiscal consolidation.

### Baseline Results (Rapidly-Adapting Expectations)
- Near-term (first year) impacts:
  - Output level and growth decline relative to a no-policy change scenario.
  - Real interest rate falls immediately without raising policy rates (announcement puts inflation on a downward path).
  - Private investment is supported in the near term.
  - Private consumption declines on impact due to:
    - Income effects: lower interest income and lower expected after-tax income (expected fiscal response).
    - Substitution effect: lower returns on future savings would encourage consumption, but income effects dominate.
  - Real exports fall as lower inflation causes real effective exchange rate (REER) appreciation.
- Medium run:
  - Inflation and interest rates permanently lower.
  - Level and growth rate of output increase via capital accumulation supported by lower real interest rates.
  - Private consumption rises as labor demand and incomes increase; large share of hand-to-mouth consumers amplifies the effect.
  - Net exports continue to detract from growth due to appreciated REER.
  - Government maintains constant overall fiscal balance: government consumption increases over time with lower interest costs.
  - Public debt is higher in the long run under the assumed fiscal rule, while interest costs as a share of GDP are permanently lower by 0.6 percent of GDP over the medium run.
- Model-implied sacrifice ratio (output loss per percent inflation decline) under baseline:
  - 0.6 (estimated over a three-year period).

### Role of Expectations Credibility (Sacrifice Ratios)
- Sacrifice ratio outcomes by expectation specification:
  - Fully forward-looking expectations: sacrifice ratio ≈ 0.1.
  - Rapidly-adapting (baseline): sacrifice ratio = 0.6.
  - Gradual learning: sacrifice ratio = just above 1.
- Mechanisms:
  - Fully forward-looking: inflation and real interest rate fall faster → sharper investment increase, muted near-term consumption decline, limited REER appreciation.
  - Gradual learning: higher initial nominal policy rates required → higher real interest rate, reduced investment and consumption, larger government interest cost savings delayed.

### Market Reaction: Lower Inflation Risk Premia (UIP Reduction)
- Simulation design: reduce UIP exogenous premium for South Africa by 25 basis points gradually and permanently over 5 years.
- Impacts with lower risk premia:
  - First-year output decline remains but is slightly lower than baseline; stronger medium-term GDP growth.
  - Sharper fall in the real interest rate supports investment, income, and near-term private consumption.
  - Larger REER appreciation leads to stronger declines in exports, but higher investment and consumption offset this.
- Sacrifice ratios with lower risk premia:
  - Baseline with lower premia: sacrifice ratio = 0.2.
  - Fully forward-looking + lower premia: sacrifice ratio = 0 (no output costs).
  - Gradual learning + lower premia: sacrifice ratio = 1.1.
- Medium-term gains and fiscal effects:
  - Rapidly adapting or fully forward-looking scenarios: temporary medium-term output gains of 0.6–0.8 percent due to higher investment and private consumption.
  - Public interest costs decline by up to 0.8 percentage points of GDP in the medium term in these scenarios.

### Monetary-Fiscal Interactions: Fiscal Consolidation Scenario
- Fiscal consolidation design:
  - Spending-based consolidation of 1.8 percentage points of GDP over three years.
  - Lower UIP risk premia decline by 25 basis points as above.
- Near-term effects:
  - Fiscal consolidation lowers government consumption and output in the near term relative to no-consolidation scenarios.
  - Interest rates decline relatively more with consolidation, but lower aggregate demand depresses private consumption and investment.
  - REER appreciation moderated in the near term because lower government consumption reduces demand for non-tradables.
  - Exports fall by less with consolidation than without consolidation.
- Interaction effects (multipliers and marginal sacrifice ratios):
  - Implicit fiscal multiplier for the consolidation:
    - 0.4 for fully forward-looking expectations.
    - 0.6 for rapidly adapting expectations.
    - 0.7 for gradually learning expectations.
  - Marginal sacrifice ratio of the inflation target change conditional on fiscal consolidation:
    - Fully forward-looking expectations: -0.3 (negative).
    - Rapidly adapting expectations: 0.5.
    - Gradual learning expectations: 0.8.
  - Combined policy costs are lower than the sum of separate costs because consolidation supports disinflation and lower risk premia assist both policies.
- Additional considerations:
  - Administered prices for public utilities account for around 16 percent of the consumption basket; if these rise more slowly under consolidation, the sacrifice ratio could be reduced further (not captured in the model).
  - Greater declines in risk premia in response to fiscal policy could further lower sacrifice ratios.

### Conclusions and Policy Implications
- Key determinants of transmission:
  - Credibility of the central bank in influencing inflation expectations.
  - Central bank’s ability to affect market views of inflation risk premia.
  - Monetary-fiscal interactions and coordination.
- Main findings:
  - Lowering the inflation target yields medium-term benefits: supports investment and output, reduces financing costs for private sector and government.
  - Near-term transition costs can occur; magnitude depends critically on credibility (expectations) and risk premia responses.
  - Greater central bank credibility and larger declines in inflation risk premia materially lower transition costs.
  - Fiscal consolidation can reinforce disinflation and reduce the marginal sacrifice ratio, despite deepening near-term output declines relative to no consolidation.
- Policy recommendations emphasized:
  - Maintain central bank independence and credibility to minimize transition costs.
  - Coordinate monetary and fiscal policies to reinforce disinflation and debt reduction objectives.
  - Consider administered prices and potential additional declines in risk premia when designing combined policy reforms.

### Box 1 — Selected Country Examples of Experiences with Lowering Inflation Targets (high-level takeaways)
- Brazil: gradual glide path toward 3 percent with tightening of bands and communication to build credibility; glide path of 0.25 percent per year over 6 years beginning in 2017; continuous 3 percent target (+/- 1.5 percent) from 2025.
- Czech Republic: gradual glide from 4.5 percent (+/-1) in 2000 to 2 percent (+/-1) by 2005; target defined initially as ‘net inflation’, later full CPI.
- Indonesia: adopted IT in 2005; midpoint reduced from 6 to 2.5 percent over time; midpoint set at 2.5 percent in 2024; has generally returned inflation to the target range post-shocks.
- Philippines: IT adopted 2002; shifted from range to point target with tolerance bands; target at 3 percent (+/-1) after 2015.
- Canada: glide path from roughly 4–5 percent in 1991 to 2 percent by end-1995 with +/-1 band; subsequent renewals and clarifications emphasized midpoint significance.
- UK: adopted IT in 1992; modified to a 2.5 percent point target in 1997 (+/-1) and later to 2 percent (+/-1).

*Source: IMF staff calculations using GIMF.*

### References .............................................................................................................

### Macroeconomic Effects of Lowering South Africa’s Inflation Target

### Introduction
- Inflation targeting (IT) frameworks have been widely used; 45 countries are currently identified as having an IT monetary regime.
- When well designed and credible, IT frameworks have been associated with lower inflation outcomes and more stable macroeconomic environments; successful IT countries tend to face lower risk premia on their debt.
- South Africa adopted inflation targeting in 2000, establishing a 3–6 percent band as the operational guide for monetary policy.
- In 2017 the South African Reserve Bank (SARB) communicated a preference for targeting the midpoint of its target range (4.5 percent).
- In July 2025 the SARB announced a preference for lowering its preferred target from the midpoint (4.5 percent) to the lower bound (3 percent) of its target band.
- Observed developments around the announcement:
  - Inflation averaged 3.1 percent in the first half of 2025.
  - Two-year ahead inflation expectations reached 4.2 percent in July 2025.
- Central trade-offs highlighted:
  - Low and stable inflation yields macroeconomic benefits: higher confidence, higher growth, stronger purchasing power (benefitting the poor), lower inflation premia, and reduced exchange rate pressures/volatility.
  - Achieving lower expectations typically requires a tighter monetary stance, potentially causing near-term output and employment costs (the “sacrifice ratio”).
  - These costs depend critically on the credibility of the central bank and the forward-looking nature of expectations.

### Context: South Africa’s Inflation Targeting Experience
- Timeline and key facts:
  - IT introduced in 2000 with a 3–6 percent band.
  - Planned narrowing to 3–5 percent in 2004–05 abandoned after 2001 spike in the Rand and subsequent inflation accelerations (including 2008 commodity price surge).
  - Between 2011–17 inflation hovered around the upper end of the target range.
  - Post-pandemic inflation surge led the SARB to tighten monetary policy during 2021–23; inflation declined to 4.4 percent in 2024.
  - SARB’s July 2025 statement favored a 3 percent target.
- Motivations and assessments:
  - Reviews (Honohan and Orphanides 2022; National Treasury 2024) found IT successful in anchoring expectations but noted the wide band contributed to higher inflation risk premia.
  - Independent Review recommended moving to an explicit point target of 3 percent.
  - Alternative views:
    - Hall (2025) suggests theoretical zero-inflation but practical 2–3 percent.
    - Burger (2025) suggests range 1.5–4.5 percent with midpoint 3 percent.
- International experience:
  - Early adopters (Canada, UK) implemented point targets (2.5 to 2 percent) with narrow bands successfully.
  - Czech Republic moved from 4.5 percent (+/- 1 percent) in 2000 to 2 percent (+/- 1 percent) by 2010.
  - Emerging markets such as Indonesia, the Philippines, and Brazil reduced targets from 5–8 percent to 2.5–3 percent.

### Modeling Framework (GIMF) and Calibration for South Africa
- Model description:
  - Uses IMF’s Global Integrated Monetary and Fiscal Model (GIMF), a multi-region dynamic stochastic general equilibrium (DSGE) model with micro-founded households and firms, nominal and real rigidities, and bilateral trade in intermediate, investment, and consumption goods.
  - Captures monetary and fiscal interactions, inflation, output, and trade dynamics; suitable for assessing impacts of changing inflation target in an open emerging market economy.
  - Monetary policy in GIMF follows an inflation-targeting calibrated Taylor rule; fiscal policy adjusts tax rates, expenditures, and transfers to stabilize debt and provide countercyclical support, keeping debt on a constant path via a fiscal deficit target.
- Key assumptions and model features:
  - Households:
    - Two groups: (i) overlapping generation (OLG) households who make consumption, savings, and labor-supply decisions; (ii) liquidity-constrained households who consume all income each period and follow OLG labor-supply decisions.
    - This introduces non-Ricardian behavior and habit persistence.
  - Firms:
    - Monopolistic competition, Cobb-Douglas technology, nominal rigidities, real adjustment costs on investment.
    - Financial accelerator as in Bernanke, Gertler, and Gilchrist (1999) with endogenous corporate risk premia.
  - Trade:
    - Bilateral modeling of consumption, investment, and intermediate goods, responsive to demand, supply, terms of trade, and real exchange rates.
- South Africa-specific calibration adjustments:
  - Nominal rigidities informed by South Africa-specific Phillips curve estimates with a quarterly slope of 0.25.
  - Markups in domestic goods markets assumed higher than baseline for advanced economies.
  - Share of liquidity-constrained households set at 60 percent (greater than advanced economies' 25 percent), reflecting financial constraints and high inequality.
  - Sectoral coverage includes tradables and non-tradables: agriculture, mining, manufacturing, and services.
- Data sources for calibration:
  - OECD Inter-Country Input-Output Database (2023).
  - IMF’s Government Finance Statistics database.
- References for model and applications:
  - Kumhof and others (2010); Anderson and others (2013); IMF (2023); Carton and Muir (forthcoming).

### Key Modeling Insights and Results (as presented)
- Main modeling conclusions highlighted:
  - Near-term output costs (the “sacrifice ratio”) depend strongly on inflation expectations: the more forward-looking expectations are — which depend on central bank credibility — the lower the sacrifice ratio.
  - Greater sensitivity of inflation risk premia to the announcement of a lower inflation target reduces output costs.
  - Concurrent fiscal consolidation can support the disinflation process.
- Simulation setup:
  - The GIMF model is used to simulate the announced reduction in the SARB’s inflation target (from the midpoint 4.5 percent to the lower bound 3 percent), with scenarios varying assumptions about:
    - Inflation expectations formation and credibility,
    - Sensitivity of inflation risk premia to the announcement,
    - Fiscal policy responses (including fiscal consolidation).

*Source: IMF Working Paper – "Macroeconomic Effects of Lowering South Africa’s Inflation Target" (excerpts from the provided PDF).*

### 4.5 to 3 percent. The analysis focuses on the impact of this policy change on key macroeconomic variables,

### Macroeconomic Effects of Lowering South Africa’s Inflation Target

### Scenario design and expectations specifications
- Policy change considered: lowering the inflation target from 4.5 to 3 percent.
- Three key inflation expectations specifications in the model:
  - "fully forward-looking” expectations: changes in the inflation target are immediately and completely integrated into expectations (proxied by reducing the degree of nominal rigidities).
  - "rapidly-adapting” expectations: expectations adjust swiftly to information about the central bank’s new inflation target (GIMF baseline calibration).
  - "gradual learning”: expectations evolve more slowly, as backward-looking agents take time to learn about and adapt to the new inflation target.
- Two additional variations:
  - A lower inflation target combined with reduced country risk premium due to lower inflation risk (simulated as a UIP exogenous premium reduction).
  - A fiscal consolidation alongside the change in the inflation target and lower risk premia.

### Baseline results: rapidly-adapting expectations
- Near-term impacts (rapidly-adapting expectations baseline):
  - The level of output (and growth rate) declines in the first year following implementation compared to a no-policy change scenario.
  - The real interest rate falls immediately without the need to raise policy rates, as the policy announcement puts inflation on a downward path.
  - Private investment is supported in the near term.
  - Private consumption declines on impact due to two dominating channels:
    - Income effects: lower interest income on household savings and lower expected after-tax income (expected fiscal response) depress consumption for non-liquidity constrained individuals.
    - Substitution effect: lower returns on future savings push some to consume more today — but in the model the two income effects dominate.
  - Real exports fall as lower inflation causes the real effective exchange rate to appreciate.
- Medium-run impacts:
  - Inflation and interest rates are permanently lower.
  - Level and growth rate of output increase through capital accumulation supported by lower real interest rates.
  - Private consumption rises as labor demand and incomes increase; a high share of hand-to-mouth consumers amplifies this effect.
  - Net exports continue to drag on growth due to an appreciated real exchange rate.
  - Government maintains a constant overall fiscal balance, so government consumption increases over time in line with lower interest costs.
  - Public debt is higher in the long run under the assumed fiscal rule, while interest costs as a share of GDP are permanently lower (by 0.6 percent of GDP over the medium run).
- Model-implied sacrifice ratio (output loss per percent inflation decline) under the baseline scenario:
  - 0.6 (estimated over a three-year period).

### Role of expectations credibility
- Sacrifice ratio outcomes by expectation specification:
  - Fully forward-looking expectations: sacrifice ratio falls to around 0.1 (little to no cost to output).
  - Rapidly-adapting (baseline): sacrifice ratio = 0.6.
  - Gradual learning: sacrifice ratio estimated at just above 1.
- Mechanisms:
  - With fully forward-looking expectations, inflation and the real interest rate fall faster, supporting a sharper increase in investment, moderating near-term consumption declines, and limiting REER appreciation (exports fall less).
  - With gradual learning, higher initial nominal policy rates are needed, raising the real interest rate, reducing investment and consumption, increasing saving incentives, and lowering interest cost savings for the government relative to other scenarios.
- Comparative literature noted (for context within source):
  - SARB’s 2024 Monetary Policy Review and Loewald et al. (2025): sacrifice ratio ~0.4–0.5 (over 2–5 years).
  - Burger (2025): sacrifice ratio ~0.3 (over two years).
  - Loewald et al. (2022): SVAR estimate just over 0.5 (two-year period); trend analysis found no output loss for 2016–19 trend inflation reduction.

### Market reaction: implications of lower inflation risk premia
- Simulation of lower inflation risk premia:
  - Model does not endogenously adjust risk premia; effect simulated by reducing the UIP exogenous premium for South Africa by 25 basis points gradually and permanently over 5 years.
- Impacts with lower risk premia:
  - The first-year decline in output remains but is slightly lower than baseline; stronger GDP growth over the medium term.
  - Sharper fall in the real interest rate supports investment, income, and private consumption in the near term.
  - Larger REER appreciation due to lower risk premia leads to stronger declines in exports, but not enough to offset higher investment and consumption.
- Sacrifice ratio with lower risk premia:
  - Baseline scenario with lower premia: sacrifice ratio = 0.2 (significantly lower than without lower premia).
  - Fully forward-looking expectations + lower premia: sacrifice ratio = 0 (implying no output costs).
  - Gradual learning + lower premia: sacrifice ratio = 1.1 (only slightly lower than scenario without UIP reduction).
- Medium-term gains and fiscal effects with lower premia:
  - In rapidly adapting or fully forward-looking scenarios: temporary medium-term output gains of 0.6–0.8 percent due to higher investment and private consumption.
  - Public interest costs decline by up to 0.8 percentage points of GDP in the medium term in these scenarios.

### Monetary-fiscal interactions: implications of fiscal consolidation
- Fiscal consolidation design in scenario:
  - Spending-based fiscal consolidation of 1.8 percentage points of GDP over three years (broadly in line with authorities’ recent budgets).
  - Lower UIP risk premia assumed to decline by 25 bp as in previous scenario.
- Near-term effects of consolidation:
  - Fiscal consolidation lowers government consumption and output in the near term relative to scenarios without consolidation.
  - Interest rates with consolidation decline relatively more, but lower aggregate demand depresses private consumption and investment compared to no consolidation.
  - REER appreciation is moderated in the near term because lower government consumption reduces demand for non-tradable goods.
  - Exports fall by less with consolidation compared to scenarios without consolidation.
- Interaction effects on sacrifice ratios and multipliers:
  - Fiscal consolidation helps reduce the marginal sacrifice ratio associated with lowering the inflation target under all expectation assumptions.
  - Implicit fiscal multiplier associated with the fiscal consolidation in the model:
    - 0.4 for fully forward-looking expectations.
    - 0.6 for rapidly adapting expectations.
    - 0.7 for gradually learning expectations.
  - Marginal sacrifice ratio of the inflation target change conditional on fiscal consolidation:
    - Fully forward-looking expectations: -0.3 (negative).
    - Rapidly adapting expectations: 0.5.
    - Gradual learning expectations: 0.8.
  - The output costs of combined fiscal consolidation and disinflation are lower than the sum of costs of implementing each policy separately because fiscal consolidation supports disinflation and lower risk premia assist both policies.
- Additional considerations:
  - If administered prices for public utilities (electricity, water, some transportation) — which account for around 16 percent of the consumption basket — were to rise more slowly under consolidation, the sacrifice ratio could be reduced further (not currently captured in the model).
  - Greater declines in risk premia in response to fiscal policy could further lower sacrifice ratios.

### Conclusions and policy implications
- Key determinants of the macroeconomic transmission of lowering the inflation target:
  - Credibility of the central bank in influencing inflation expectations.
  - Central bank’s ability to affect market views of inflation risk premia.
  - Monetary-fiscal interactions and coordination between authorities.
- Main findings:
  - Lowering the inflation target has important medium-term benefits: supports investment and output and reduces financing costs for the private sector and government.
  - Near-term transition costs can occur; their magnitude depends critically on credibility (expectations) and risk premia responses.
  - Greater central bank credibility in reducing inflation expectations and inflation risk premia lowers transition costs considerably.
  - Fiscal consolidation can reinforce disinflation and reduce the marginal sacrifice ratio, even though it may deepen near-term output declines relative to no consolidation.
- Policy implications emphasized:
  - Maintain central bank independence and credibility to minimize transition costs.
  - Coordinate monetary and fiscal policies to reinforce disinflation and debt reduction objectives.
  - Consider the role of administered prices and potential additional declines in risk premia when designing combined policy reforms.

*Source: IMF staff calculations using GIMF.*

### Box 1. Selected Country Examples of Experiences with Lowering Inflation Targets

### Box 1. Selected Country Examples of Experiences with Lowering Inflation Targets

### Country examples and experiences
- Brazil
  - In 1999 Brazil adopted the IT framework with a band of +/- 2 percent around a mid-point of 8 percent.
  - During the first few years of the IT regime authorities announced several downward adjustments to the bandwidth and mid-point.
  - Starting in 2005, the announced target became more stable at 4.5 percent (+/- 2 percent).
  - In 2017 the band was tightened to +/-1.5 percent and the authorities decided to start reducing the target over a period of 6 years by 0.25 percent each year (down to 3 percent).
  - Authorities kept their glide path through this period, including during the monetary tightening cycle of the post pandemic period, and actual inflation fell within the target range except in 2021–22 due to the pandemic.
  - In mid-2023 the National Monetary Council replaced the previous practice of setting medium term targets three years in advance every calendar year for a continuous 3 percent target (+/- 1.5 percent) from 2025 onwards. This change was established by presidential decree, and is deemed to have helped re-anchor medium term expectations.
  - At the same time, policy action and communication have been geared to build credibility around the continuous target.
  - In recent quarters inflation has once again deviated from the target and the central bank is responding within the framework with a new monetary tightening cycle.

- Czech Republic
  - IT was officially introduced in the Czech Republic in 1999, following a detailed assessment of the necessary prerequisites, and in the context of the country’s integration into the EMU.
  - The target established for year 2000 (4.5 percent +/- 1 percent) would gradually move to the long-term target until 2005 (2 percent +/- 1 percent), which was considered the price stability level. This implied a yearly glide of half a point.
  - The Czech framework defines its targets in terms of ‘net inflation’, which is derived from the overall CPI adjusted for regulated prices, i.e. prices affected by administrative interventions and for indirect tax changes. This was later replaced by the full CPI and since 2010 the target was set at 2 percent (+/- 1 percent of tolerance).
  - A set of exceptions were established that allowed authorities not to react immediately to avoid creating counterproductive effects on the real economy. The exceptions are mainly exogenous and unforeseeable factors: substantial changes in global prices, deviation of the exchange rate unrelated to domestic monetary policy, agricultural shocks, and natural disasters.

- Indonesia
  - Following the reforms in the aftermath of the Asian Crisis, the Bank of Indonesia officially adopted an IT framework in 2005.
  - The country has gradually reduced the midpoint of the target band from 6 to 2.5 percent.
  - The initial glide path from the originally announced 6 percent (+1 percent) was later revised and raised in response to shocks associated with volatile oil prices and the global financial crisis of 2008/2009.
  - By 2015, headline inflation was in the mid-single digits, and for 2016 a band of +/- 1 percent was announced around a target of 4 percent.
  - Subsequent announcements in 2018 and 2020 lowered the midpoint target to 3.5 and 3 percent respectively, and actual inflation has remained within or below the target band since then, except in 2022.
  - The target band was again lowered in 2024, with the midpoint set at 2.5 percent.
  - Bank Indonesia (BI) has been consistently successful at returning inflation to the target range, including following the post-COVID-19 inflation surge.
  - Exchange pass through is now relatively moderate and inflation expectations well anchored.
  - Private sector FX denominated debt has declined as a share of GDP since the mid 2010’s, including due to BI’s complementary policy efforts.

- Philippines
  - Inflation targeting, defined in terms of a range, was formally adopted as the framework for monetary policy in January 2002.
  - For 2005–2006 the range was 4–5 percent.
  - In December 2006, the inflation target was re-specified from a range target to a point target with a tolerance interval of +/- 1 percentage point starting with the target for 2008.
  - The inflation target in 2010 was 4.5 percent with a tolerance of +/- 1 percent, and the target announced from 2011 onwards was 4 percent (+/- 1 percent).
  - After 2015, the target was set at 3 percent (+/- 1 percent) and has remained unchanged except for 2018 and the post pandemic period; headline inflation has fluctuated within the target range.
  - For 2025, inflation is expected to remain within the target band.

- Canada
  - When the country initially adopted an inflation target in 1991, the inflation rate was around 4–5 percent.
  - The government and the Bank of Canada agreed to a glide path to take inflation (measured by CPI) gradually to 3 percent by the end of 1992, then 2.5 percent by mid-1994, and finally 2 percent by the end of 1995 with a band of +/-1 percent around the target.
  - The glide path targets were not treated as rigid commitments and the Bank emphasized flexibility in the horizon to achieve its targets.
  - Subsequent reviews included explicit language clarifying the importance of the midpoint of the target band, emphasizing that the band should be interpreted “as a reflection of [...] short-run uncertainty” rather than “a measure of [...] indifference”.
  - The 2001 agreement provided more detail on operational aspects of the monetary policy framework, especially concerning the role that measures of core inflation played in the Bank of Canada’s decision making, and incorporation of financial stability considerations in exceptional circumstances.
  - Renewals are presently carried out every five years and are normally preceded by a research program focused on specific issues.

- UK
  - The UK adopted an IT framework in 1992. The initial target was announced as a range of 1–4 percent (“with the intent to be in the lower part of the range”) and “2 percent or less” for the long run.
  - In the initial years actual inflation fluctuated around 2–3.3 percent, but inflation expectations and risk premiums signaled long-run credibility issues.
  - The regime was modified to a 2.5 percent point target in 1997 (+/- 1 percent range) and expectations fell accordingly relatively quickly and the inflation premium on long-term bonds aligned with the target.
  - The announcement on IT was part of a broader monetary framework reform that assigned instrument independence to the Bank of England.
  - Further changes were introduced in 2003, when a different index was introduced though the essential elements were kept, leaving the IT at 2 percent point target with +/- 1 percent band.

*IMF Working Paper No. WP/2025/237 — Box 1. Selected Country Examples of Experiences with Lowering Inflation Targets*

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_Source: https://www.imf.org/-/media/files/publications/wp/2025/english/wpiea2025237-source-pdf.pdf_