Macroeconomic Effects of Lowering South Africa’s Inflation Target

IMF Working Papers, November 7, 2025

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Uses the IMF’s Global Integrated Monetary and Fiscal model (GIMF) to explore macroeconomic implications of lowering the inflation target in an Emerging Market such as South Africa.
Model-based simulations indicate that lowering the inflation target from 4.5 to 3 percent may entail moderate near-term output costs (measured by the so-called “sacrifice ratio”), while leading to medium-term output gains and lower borrowing costs.
Near-term costs critically depend on the credibility of the central bank, which determines the speed with which agents adjust their inflation expectations.

Model: Global Integrated Monetary and Fiscal model (GIMF).
Policy experiment: Announcement and implementation of a lower inflation target, from 4.5 to 3 percent.
Key mechanism examined: speed of adjustment of inflation expectations following the announcement and sensitivity of risk premia to the announcement.

Lowering the inflation target from 4.5 to 3 percent:
- May entail moderate near-term output costs, measured by the “sacrifice ratio”.
- Can produce medium-term output gains.
- Can lead to lower borrowing costs over time.
Credibility effects:
- Output costs are lower when inflation expectations adjust more rapidly following the announcement of the new target by the central bank.
Risk premia effects:
- Higher sensitivity of risk premia to the announcement of a lower inflation target can further reduce near-term output costs.

Strengthen central bank credibility to speed adjustment of inflation expectations and reduce near-term output costs.
Recognize that reductions in risk premia associated with a credible lower inflation target can lessen the sacrifice ratio.
Concurrent fiscal consolidation can:
- Help support the disinflation process.
- Lower the marginal sacrifice ratio.