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

_IMF Working Papers, November 7, 2025_

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**Canonical URL:** [Macroeconomic Effects of Lowering South Africa’s Inflation Target](https://www.imf.org/en/publications/wp/issues/2025/11/07/macroeconomic-effects-of-lowering-south-africas-inflation-target-571701)

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## Bibliographic details
- Authors: . Jana Bricco, Mario Mansilla, Delia Velculescu, Philippe Wingender
- Published: November 7, 2025
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798229031141.001

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### Summary
- 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 and Scenarios
- 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.

### Main Findings
- 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.

### Policy Implications and Recommendations
- 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.

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_Source: https://www.imf.org/en/publications/wp/issues/2025/11/07/macroeconomic-effects-of-lowering-south-africas-inflation-target-571701_