Inflation expectations slow to align with SARB's 3% target

A South African Reserve Bank (SARB) working paper investigates the dynamics of inflation expectations as the central bank transitions to a new 3% inflation target.

The research examines how quickly expectations adjust, the interplay of forward- and backward-looking information, and the implications for model calibration and central bank communication.

Drawing on the 2017 shift from a 6% to a 4.5% target, the study highlights the influence of macroeconomic conditions and public attention on expectations formation.

It finds that prior beliefs typically play a dominant role in shaping the current expectations of survey respondents.

While there is variation across groups and macroeconomic conditions, when respondents update their beliefs using new information, they tend to rely more heavily on information about the target than historical inflation.

This suggests a challenge for the SARB in guiding expectations to the lower target.

Empirical results for the period ending 2025Q1 show financial analysts and trade unions have significantly increased their focus on the inflation target.

However, firms continue to rely more on prior beliefs and historical inflation.

With November 2025 inflation at 3.5%, the paper suggests firms' convergence to the 3% target is likely delayed by the time it takes to update beliefs formed during post-COVID-19 inflation.

This contrasts with the 2017 shift to a 4.5% target, where financial analysts achieved 90% convergence in 4 quarters, trade unions in 2 quarters, and firms in 7 quarters.