Why the Reserve Bank’s 3% inflation target will help the poor

SA Reserve Bank governor Lesetja Kganyago is on a campaign to lower inflation from the current 3–6% “range” to 3%. No range, just a 3% ceiling.

Whenever economic planners talk about a “range” you know there is wiggle room built into the plan.

This time, Kganyago seems to have had enough. Business Day recently reported on his plan to inflation target from the current 3–6% midpoint (4.5%) to a formal 3%, framing it as a tool for social equity, economic growth, and fiscal savings. This builds on recent Monetary Policy Committee (MPC) modelling.

Kganyago calls it a "pro-poor, pro-growth, and fiscally prudent" move, countering the idea that lower targets hurt the economy. He ties it to lower interest rates and stable money:

Lower Rates Logic: "If you want lower interest rates, you should have a lower inflation target. So this sort of sounds counterintuitive. But the point here is that there is no country that has low interest rates and high inflation. There isn’t."

Stability Benefits: At 3%, prices rise slower – using the "rule of 72," purchasing power halves in 24 years (vs. 12 years at 6%). He contrasts this with advanced economies like the US/UK (2% target): "The average price is only doubled once in 36 years... That’s why they have higher standards of living than us because their money is more stable than ours."

MPC Progress: The MPC has already used 3% in forecasts (three months ago), signalling readiness.

Why lower inflation helps the poor

The poor experience inflation differently, as Kganyago correctly observes.

When headline inflation hit 7.8%, the poor faced inflation of 9.8% because they spend more on volatile items like food, transport and energy. There are no cushions like dividends and interest on savings for them.

A 3% inflation target slows overall rises, easing this burden without static prices. "Even with low inflation, it does not mean that prices are static. They just rise at a lower pace," notes the governor.

National Treasury is assuming a 4.5% inflation target for now, but is prepping for a 3% target as it prepares its medium term budget for finance minister Enoch Godongwana in late November 2025.

Here are the benefits

The country will save around R900 billion in debt costs over the next decade, or R30 billion a year at a more conservative estimate. This is equivalent to raising VAT by two percentage points, which is what the government was trying to do – and failed – earlier this year. There can be no more talk of raising VAT. The income has to come from savings and this is the best shot SA has at the moment.

Another benefit is that lower inflation is pro-growth. This could provide a 0.3% growth boost in the first year, but the real benefits appear from year three onwards, when growth starts to accelerate.

Long-term, lower capital costs boost investment, according to research by Richard Kima and Keagile Lesame.

There’s an opportunity here that must not be missed, says the governor. Lower inflation frees funds for social spending, anchors expectations, and supports growth without tax hikes. "My preference is that we should grab this opportunity,” says Kganyago.

Who would oppose this?

Yes, there are groups that oppose lower inflation, believe it or not. Trade unions keep a beady eye on consumer inflation and use this as the lower benchmark for wage negotiations. They look good when they secure a 7% wage rise when inflation is 5%. When inflation is 3%, they will be lucky to secure 4% wage increases. That makes them look bad, even though this is in the long-term interests of their members.

Then there are state-owned enterprises like Eskom that are accustomed to getting double-digit tariff increases from regulators. They will find it harder to demand 13% tariff increases when inflation is at 3%. Because Eskom, Transnet and other SOEs are fighting a rear-guard action in trying to make up for the plunder and under-investment of the last two decades, they will be brutally exposed by a low inflation environment.

When inflation is low, interest rates are low. Mortgage and credit card costs will come down. People will have more disposable incomes. They will pay off debt and start to spend more, thereby boosting economic growth even further.

Will it happen?

Almost certainly. After the 2 percentage point VAT fiasco earlier this year, government must find new ways to fund its activities. It will have to cut fat, get a grip on the rotten tendering system that has defiled public finances, and bring inflation down. That’s the only glimmer of hope right now.