The SARB’s ‘preference’ for a 3% inflation target could reshape retirement fund planning, but without Treasury alignment and reforms, trustees must brace for a bumpy transition.
By Vernon Wessels
For pension fund trustees, few policy debates matter more than inflation. It determines how far someone’s rand will stretch in retirement and how trustees balance risk across portfolios.
After the Monetary Policy Committee’s (MPC) meeting at the end of July, South African Reserve Bank (SARB) Governor Lesetja Kganyago announced that 3% is the Bank’s new “preferred” target. Crucially, this was done without approval from Finance Minister Enoch Godongwana – who ultimately sets the mandate, even though the SARB independently implements it – earning Kganyago and his team a sharp rebuke.
The SARB argued it acted opportunistically, seeing a window to anchor expectations while inflation was subdued. Deputy Governor Fundi Tshazibana said: “waiting would have been ideal, because then there would not be confusion between what is a preference and what is a target,” but the Bank felt compelled to act.
Tshazibana said this moment – with inflation low — was a chance to shift expectations at relatively low cost. Godongwana, however, is adamant he will not be rushed.
Why inflation targeting matters
Inflation targeting has been the anchor of South African monetary policy since 2000, with the SARB aiming to keep price growth between 3% and 6%. In 2017, authorities shifted emphasis to the 4.5% midpoint, lowering inflation expectations and borrowing costs.
For retirement funds, the stakes are clear:
- Erosion of purchasing power: A retiree drawing R10,000 a month today will need almost R18,000 in 10 years if inflation averages 6%. If inflation is at 3%, this burden is eased dramatically
- Lower interest rates – eventually: The SARB argues a 3% target could save the government R600bn in debt service costs by 2030, freeing fiscal space for growth-friendly spending. Lower borrowing costs would also filter into cheaper credit and more predictable returns for long-term investors like pension funds.
- Transition risks: To get inflation down and keep it there, rates may need to stay higher for longer, some analysts and economists argue. That will benefit bond portfolios in the long run but risks a short-term drag on equities, property and growth-sensitive assets.
SARB vs Treasury
The clash between the SARB and Treasury is less about the goal – most agree that lower inflation is desirable – than about timing, sequencing and political buy-in.
Citi economist Gina Schoeman says it takes longer for the National Treasury to make macro policy changes than it does for the SARB to identify a window of opportunity
“In 2017, they said, ‘We prefer 4.5%’, but now in 2025, they’ve said, well, we prefer 3%, but we’re going to be very tolerant about achieving that over the next two years.’”
Treasury, Schoeman says, is working in parallel on a fiscal anchor – rules to discipline spending and borrowing. “What you might find is that they’re just waiting to finish the work on the fiscal anchor, and then they will announce both the official inflation target and the fiscal anchor together,” she says.
But credibility will be tested if Treasury delays this. “By February next year… we’re going to move into more difficult territory around how much credibility there is in the synchronisation of both monetary and fiscal policy,” says Schoeman.
As it is, the SARB argues that South Africa is already an outlier, with most emerging markets targeting inflation of around 3%. Its modelling suggests a lower target could eventually reduce the repo rate by as much as 150 basis points.
Ignoring the other fixes
Not everyone is convinced the benefits of a lower target outweigh the costs, however.
Xhanti Payi, economist and senior manager at PwC, warns that lowering the target in current conditions could backfire.
“Nobody disagrees with the fact that we all want low inflation… but unfortunately, you don’t get to low inflation by announcing a low target,” he says.
The danger is clear, given the fact that while inflation was at 2.9% a few months ago, it now sits at 3.5%. “If the minister had agreed and said ‘Yes, go ahead’, the Reserve Bank would probably have had to hike rates in this environment,” said Payi.
That, he argues, would be destructive. “Inflation is going up not because people are spending more, but because of external shocks. So, if we increase interest rates to try and control that, they’re just punishing people and punishing the economy.”
Futuregrowth Asset Management CIO Nick Balkin echoes the caution, arguing that Godongwana is right not to rush.
“Lower inflation does not automatically mean lower borrowing costs for the South African government,” he says. With a long-dated debt profile, any gains filter through only gradually. Lower inflation also means lower nominal GDP growth, worsening the debt-to-GDP ratio unless real growth accelerates.
South Africa’s steep risk premium – investors demand about 5% after inflation, double that of its peers – reflects governance failures, energy insecurity and fiscal uncertainty rather than the inflation target.
Unless those fundamentals improve, borrowing costs will remain high regardless of the inflation target, Balkin says.
What markets are watching
Analysts at PSG and Anchor Capital say a shift to 3% could lower bond yields, strengthen the rand and draw foreign capital. But these gains depend on fiscal alignment and restraint in administered prices such as electricity and municipal tariffs.
Without that, the private sector would need to undershoot sharply to hit 3%, forcing the SARB into more aggressive rate hikes.
PSG’s Felicia Makondo says monetary policy alone cannot deliver 3% inflation. “It requires a ‘Team SA’ compact: government restraint on administered prices and wages, credible fiscal consolidation, and structural reforms.”
In a paper by Codera in February titled “Gaps in the South African Inflation Targeting Debate”, the authors show that since 2009, public sector inflation has averaged 7.2%, compared with 4.9% in the private sector, if fuel is excluded.
To meet a 3% target without curbing government-administered prices, private sector inflation would have to fall to about 2.6% – roughly half its long-term average.
Anchor Capital economist Casey Sprake adds that the transition itself is risky. Some models suggest minimal output loss, while others forecast a short-term contraction of up to 0.8% of GDP.
For trustees, the message is clear: the long-term benefits of lower inflation are real, but the adjustment may be bumpy.
Why trustees should care
For pension funds, this debate has direct implications for:
- Asset allocation: A stricter target could keep rates higher for longer, favouring bonds and cash in the short run, but ultimately reducing risk premia across asset classes.
- Liability management: Lower, more predictable inflation reduces long-term liability uncertainty – good for defined-benefit funds – but may temper nominal wage growth, affecting contributions.
- Diversification: Offshore assets, inflation-linked bonds and tangible assets such as infrastructure will be vital to hedge both short-term volatility and long-term structural change.
- Engagement with managers: Trustees should ask whether managers are positioning portfolios for a “lower-for-longer” regime and how they factor in the risk of policy misalignment between the SARB and Treasury.
The bottom line
Inflation targeting is more than a technocratic exercise. For retirement funds, it sets the parameters within which long-term decisions are made. The SARB’s preference for 3% may eventually lower borrowing costs and protect savers’ purchasing power.
But without alignment from Treasury and structural reforms across government, the transition could mean slower growth, higher rates and greater strain on households.
For trustees, the task is to prepare portfolios for both outcomes. As Payi says: “there’s that pain threshold: do we have it to get to that low over a period of time?”
