The hidden risk in SA’s tighter inflation band
South Africa’s newly tightened inflation band promises stability but brings unintended pressure. While lower inflation and rate cuts may anchor expectations, they risk squeezing municipalities and businesses, slowing growth unless financial systems strengthen and local economies adapt to rising costs and restricted price adjustments.
Source: Supplied. Miyelani Holeni, chief adviser at Ntiyiso Consulting Group.
To understand the roots of this pressure, it helps to look at the shifts shaping the country’s monetary landscape.
South Africa has entered a new phase of monetary policy. The repo rate has been lowered to 6.75%, inflation is at 3.6% year-on-year, and the inflation target has been reduced to 3% with a one-percentage-point tolerance band.
The downward revision of the inflation target was implemented to align the country with other emerging economies. According to the South African Reserve Bank, South Africa’s inflation rate was ranked 94th out of 149 emerging and developing countries with available data in 2024.
These three shifts point to a future where price growth is expected to remain low for some time. This has mixed consequences for governments, municipalities, businesses and households.
On the one hand, a low-inflation environment can help stabilise public finances. When inflation is contained, salary pressures tend to ease. Public-sector wage increases may therefore grow at a slower pace, which would help moderate the wage bill and limit pressure on the fiscus.
For a state that has faced rising compensation costs for years, this offers some relief. In the long term, a lower inflation target is expected to support stronger economic growth, which in turn increases tax revenues. Furthermore, a lower inflation target is expected to lower debt-service costs due to the reduction in government borrowing costs.
But the picture looks very different for municipalities and businesses – the parts of the economy that rely directly on price adjustments to sustain operations. A lower inflation band effectively caps how much they can increase tariffs or prices. For municipalities, this is significant.
Many have historically raised electricity, water and rate tariffs at levels above inflation, and in some cases, into double digits. Data suggests that administered prices, such as those for electricity and water, have increased at a faster rate compared to other consumer price categories and sit well above the inflation target. These increases covered rising input costs and enabled basic service delivery.
Mounting cost pressures
If tariff growth is now held to within the new inflation band, municipalities will face a structural squeeze. Their largest costs – bulk electricity, bulk water and the wage bill – already exceed their revenue in many cases. They must also buy fuel, chemicals, spares and maintenance materials from the private sector, where prices often rise faster than inflation.
If these input costs cannot be recovered through tariff adjustments, several risks emerge: municipalities may fall behind on payments to Eskom and bulk water suppliers; maintenance backlogs could grow; and infrastructure failures could become more frequent. In short, service delivery could weaken further, even in municipalities currently performing well.
There is also a human capital dimension.
Critical skills shortages already affect local government. Engineers, artisans and technical specialists have been leaving for better-paying private-sector roles. If municipal salary increases are fixed at around 3% in line with low inflation, it becomes even harder to attract and retain these skills. Service delivery is ultimately powered by people, not policy, and brain drain is a real risk.
The private sector faces its own version of this pressure.
Businesses are also expected to keep price increases within the lower inflation band. If input costs rise faster than they can adjust selling prices, margins tighten. That slows revenue growth. Slower revenue growth translates directly into slower job creation.
With South Africa’s GDP growth projected at roughly 1.2%, the economy lacks the buffer to absorb further weakness in hiring. However, it should be noted that the lowering of the inflation rate and interest rates will encourage businesses to increase investment due to the lower cost of capital. This will promote job creation and spur economic growth.
It is important to recognise that the intention behind the new inflation band is sound: to protect the value of money, anchor expectations and support long-term stability.
Enabling municipal resilience
But stability alone does not deliver growth. Without co-ordination across sectors, the economy may settle into a pattern of low inflation and low growth – a combination that leaves municipalities under-resourced, businesses constrained, households struggling with poor services and limited employment opportunities.
The way forward requires balance. When budgets are tight, municipalities must focus on projects that unlock growth, support local business activity and improve the reliability of basic services. It is imperative that municipalities develop bankable projects that will qualify for funding from both public and private sources in order to encourage investment, spur economic activity and raise revenue. This is the core of Ntiyiso Consulting’s work in local government.
In many municipalities, Ntiyiso steps in to help rebuild financial systems, improve revenue management, stabilise service delivery functions and design programmes that stimulate local economic activity. Further, Ntiyiso is also able to draft comprehensive feasibility studies that ensure the bankability of projects and to source funding for the implementation of catalytic projects.
The aim is straightforward: to create practical and workable conditions for growth, enabling municipalities to serve their communities reliably and sustainably.
South Africa needs more than low inflation. We need growth that is strong enough to support households, businesses and municipalities. A repo rate cut is welcome, but it does not replace the structural reforms required to build local economies and sustainable municipalities.
What we are seeing now is a warning light: low inflation driven by weak growth, not by rising economic strength.
Municipalities sit at the centre of this challenge. If they prepare early and strengthen their financial and operational systems, they can withstand the pressure and protect the communities they serve.
This moment calls for clear thinking and decisive action.
The inflation band may be tighter, but the need for capable, well-run municipalities has never been greater.
About the author
Miyelani Holeni is the Group chief adviser at Ntiyiso Consulting.