South Africa and the impact of a lower inflation target

A lowering of the South Africa’s inflation target is being hotly debated among policymakers and we are now factoring in a change to the target, from 3-6% now to 3±1%, into our forecasts. The Reserve Bank is unlikely to have a problem meeting the new target and it should be able to cut interest rates further, and by more than most expect. All of that would help to bring down local currency bond yields; we now think the 10-year yield could fall by nearly 200bp, to 8.00%, by end-2026. That will provide only modest relief to the public finances in the near-term, but it could have a significant longer-term impact.