South Africa’s finance minister adopted a 3% inflation target, giving political backing to the central bank which lobbied for the change, while cautioning that debt will now peak at a slightly higher level.
The inflation goal has been lowered to 3% with a 1 percentage point tolerance band, Enoch Godongwana told lawmakers in Cape Town on Wednesday. The central bank’s previous 3% to 6% target range had been in place for a quarter century.
The announcement was the center-piece of his medium-term budget update, which painted an improved fiscal outlook, albeit with slightly slower economic growth this year.
“The new target will anchor inflation at permanently lower levels,” Godongwana said in a preface to the update. “This will reduce the cost of living and borrowing costs for households, businesses and government, supporting higher long-term economic growth and job creation.”
Investors had anticipated the news, fueling demand for South African assets. That’s boosted the rand, buoyed stocks and driven government bond yields lower in recent months.
The market got another lift as the announcement was digested. The rand gained 0.7% to 17.0406 per dollar by 3:13 p.m. in Johannesburg, on track for its strongest close since February 2023.
The yield on benchmark 2035 government rand bonds fell 10 basis points to 8.71%. The benchmark stock index extended gains, led by insurers and retailers.
‘Buy Bonds, Wear Diamonds’
“We all knew it was coming yet the market is loving it,” said Kristof Kruger, a fixed-income trader at Prescient Securities. “Reduced issuance, debt in check and 3% inflation target: That ticks all our boxes,” Kruger said, adding “buy bonds, wear diamonds.”
The move on the target follows loud advocacy for the change by Reserve Bank Governor Lesetja Kganyago, who announced his preference for inflation to settle at 3% in July. Godongwana complained at the time that the step was unilateral, and the choice was his to make, but they later smoothed things over.
