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Abstract The South African Reserve Bank (SARB) has recently expressed a desire to reduce its inflation target midpoint from 4.5 to 3%. This study assesses whether this proposed target aligns with the level of inflation that would have best supported economic growth in South Africa from 2003 to 2024. While past research has suggested optimal inflation thresholds that balance economic growth and financial stability, we offer two new approaches to strengthen the analysis. Firstly, unlike previous studies that have used a single, fixed inflation threshold, we propose that this threshold may change over time. We explore this by applying rolling regressions and Hansen's threshold autoregression (TAR) model to capture how inflation thresholds have evolved. Secondly, we forecast future inflation thresholds by modeling them with the autoregressive moving average (ARMA) approach. Our results indicate that the optimal inflation threshold has varied across different periods, with lower thresholds observed in earlier years and higher thresholds, particularly post-COVID-19. Our findings suggest that the SARB’s proposal to lower the inflation target may be too restrictive for fostering economic growth. Overall, our results support a flexible, state-dependent approach to inflation targeting in which policy is adjusted in line with evolving macroeconomic conditions rather than fixed long-run assumptions about optimal inflation.
Phiri et al. (Fri,) studied this question.