What to expect with the 3% inflation target

On 12 November 2025, the government formally lowered South Africa’s official inflation target to 3%. In the first interest-rate decision under the new target, the SARB lowered the main interest rate in the country by 0.25%, which was previously 7% and now stands at 6.75%

According to a SARB-commissioned working paper, moving to a 3% inflation target strengthens South Africa’s macroeconomic framework, improving policy credibility and supporting lower borrowing costs over the longer term. With more stable and lower inflation, businesses, such as SMEs, and households can borrow and plan with greater predictability.

How does this help SMEs

When inflation is lower and expectations are well-anchored, the SARB will have some room to ease rates, or at least not raise them aggressively. For SMEs, this means loans could become more affordable. SMEs can better forecast costs such as input costs and wages, without worrying about sudden inflation spikes. This can free up cash flow and allow SMEs to reinvest in growth, staff, and inventory.

Predictability is a massive advantage for small businesses with thin margins. This 3% inflation will stabilise operating costs, helping SMEs plan long-term. Predictable inflation and lower borrowing costs make private investment more attractive. This helps through funding from investors, more partnerships, and better valuation for high-growth SMEs. If maintained, the new 3% can deliver structural benefits, but before the milestone is reached, there are short-term sacrifices that must happen.

Short-term sacrifices

Lowering the inflation target alone doesn’t address deeper structural issues such as debt burden, public debt servicing, and state-owned enterprises. Critics argue that without structural reform, a lower inflation target may only deliver limited gains. Some say that debt-servicing cost relief depends not just on lower interest rates, but on sustained economic growth and narrowing of the country's risk premium, which requires more than monetary policy.

Potential downside for the household

There is concern that low inflation could squeeze nominal wage growth, which may hurt households, especially those already earning low wages. This could dampen consumption growth even if borrowing is cheaper. For the public sector, government finances may reduce nominal tax revenue growth, potentially squeezing budgets or forcing the government to spend less on services.

On balance, leaning towards moving to the 3% inflation target with credibility, discipline, and structural reforms holds, it can deliver real benefits. Translating lower interest rates into faster economic growth.