Victory for "3% Club": BER says inflation expectations collapse to record lows

Key topics:Sharp drop in inflation expectations across analysts, business & labourSARB psychology wins: anchored expectations enable future easingWage expectations stay high, implying real income gains for consumersSign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here.Support South Africa’s bastion of independent journalism, offering balanced insights on investments, business, and the political economy, by joining BizNews Premium. Register here.If you prefer WhatsApp for updates, sign up to the BizNews channel here..By Alec Hogg.A Finance Minister’s policy shift is rarely validated quite as quickly—or as emphatically—as Enoch Godongwana’s recent agreement to endorse SA Reserve Bank Governor Lesetja Kganyago’s urgings to lower the inflation target.Just a month after the Medium Term Budget Policy Statement (MTBPS) where the target was officially dropped to 3% (from the old 3 to 6% band and 4.5% midpoint), the market has delivered its verdict. And the verdict is a resounding vote of confidence.According to the latest Inflation Expectations Survey for the fourth quarter of 2025, released this morning by the Bureau for Economic Research (BER) at Stellenbosch University, inflation expectations across the board have subsided significantly.For seasoned watchers of the South African economy, the magnitude of the shift is startling. Expectations for 2026, 2027, and the next five years have all dropped by roughly half a percentage point. Respondents now see headline inflation averaging just 3.8% next year and 3.7% thereafter—a record low for the long-standing survey.The Psychological ShiftMonetary policy is as much about psychology as it is about mathematics. The South African Reserve Bank (SARB) has spent years trying to anchor expectations, knowing that if businesses and unions expect high inflation, they will price it into contracts, creating a self-fulfilling prophecy.This BER’s survey suggests the battle is being won. The "broad-based" nature of this decline is what matters most.Financial analysts, typically the most hawkish on data, are now the most optimistic, forecasting inflation to reach just 3.4% in two years. But crucially, the "real economy" players agree. Business executives have lowered their long-run forecasts by 0.5 percentage points to stabilise around 4%. Even trade union officials—historically the sceptics of low-inflation narratives—now foresee inflation dipping to 3.8% in 2027.While none of the groups have yet reached the new 3% target, the trajectory is clear.The Wage Anomaly: A Boost for the Consumer?There is, however, a fascinating divergence in the data that retailers and JSE-listed consumer stocks should pay attention to.While inflation expectations have plummeted, wage expectations have not. The professional groups did not revise their salary forecasts downward; they still anticipate salaries to rise by 4.7% next year.Do the math: if inflation is expected to be 3.8% and wages rise by 4.7%, we are looking at real wage growth of nearly 1%. After years of consumers being strangled by cost-of-living pressures, this positive gap suggests a strengthening of household balance sheets.This sentiment is echoed in the household survey itself. Ordinary South Africans have lowered their one-year inflation expectations to 5.3%—the lowest level in four years, down significantly from the panic peak of 8.1% seen in mid-2023.GDP and the RandOn the growth front, the outlook remains steady but uninspiring. Respondents see GDP growth of 1.3% in 2026, barely moving the needle from previous forecasts. This is a reminder that while price stability is returning, the structural reforms needed for rapid growth remain a work in progress.On the currency, analysts are targeting R17.09 to the dollar by the end of 2026, while business leaders are slightly more cautious at R17.65. These may be pessimistic. Despite a firmer US Dollar overnight, the Rand continues to gain ground, currently trading at R16.87 to the Greenback.The Bottom LineFor Governor Lesetja Kganyago and the MPC, this data is the green light they have been waiting for. The BER notes that the SARB will be concerned if expectations exceed the target by a significant margin. Conversely, when expectations decline broadly, as they have now, it creates room for rate cuts.With the 10-year government bond yield expected to drop to 8.62% by 2026, the cost of capital is set to decline. The "3% Club" may have seemed ambitious in November, but as we close out 2025, it looks like the smartest bet in town.

Victory for "3% Club": BER says inflation expectations collapse to record lows

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