Much has been made about the decline of survey-based inflation expectations since the lowering of South Africa’s inflation target (formally agreed with Treasury on 12 November 2025, but communicated as the preferred target by the Reserve Bank from July 2025).
Todays post summarises estimates from my recent UNU-WIDER paper with Jens Christensen that uses the entire shape of the nominal and inflation-linked bond curves to extract market-based inflation expectations and inflation risk premia. Our estimates suggest that market-implied inflation expectations have not declined since the announcement of a lower target. The estimates imply that the decline in bond yields in South Africa over the last year has reflected a decline in the sovereign credit premium, the liquidity premium and inflation risk premium. As we show in the paper however, forecasts based on data to the end of December 2025 show that expected inflation will only gradually fall towards the new target, suggesting that sustainably reducing inflation to the new target would require monetary policy to remain tight to re-anchor inflation expectations to a permanently lower level.
