In this note we stress test the new 3% inflation target.

^{by Theo Janse van Rensburg, Jeffrey Rakgalakane and Rudi Steinbach}

In this note we stress test the new 3% inflation target and conclude that:

• There is a 78% chance that inflation will vary between 2% and 4% (based on a standard deviation of around 0.9%).
• Inflation will deviate by less than 1 percentage point in the event of a standalone 1 standard deviation shock to the most important inflation drivers in the Quarterly Projection Model (over a one-year horizon).
• There is a 62% weighted probability that headline inflation will be between 2% and 4% when hit by a combination of shocks.

These outcomes are due to inflation expectations being more forward-looking (i.e. anchored by the inflation target) – particularly since the South African Reserve Bank adopted its preferred inflation target of 4.5% in mid-2017.

These results reflect increased monetary policy credibility, which bodes well for the achievement of a 3% inflation target.