An optimal inflation rate for South Africa

The objective of this paper is to consider whether the inflation target of the South African Reserve Bank, which is currently between 3% and 6%, should be lowered to something closer to that of South Africa’s trading partners, which is close to 3%. The paper reviews the theoretical literature and finds a strong contrast between much of the literature which argues for a zero inflation target and the practical implementation of inflation targeting around the world, where no country has adopted a zero target. Given this conflict it is clear that the theoretical literature is often too simplistic. The paper then considers the main arguments for a positive inflation target. The broad conclusion is that most of the arguments for a non-zero inflation target suggest a target in the range of 2% to 3%. However, any change in the target rate should be carried out slowly with full transparency and without loss of credibility.