Anchoring inflation expectations close to a new 3% target will allow the South African Reserve Bank (Sarb) to set lower short-term rates, reducing the returns investors demand for ploughing money into the country, deputy governor Rashad Cassim said.Ongoing fiscal and structural reforms would justify more credit rating upgrades for the country and improve demand for local bonds, he said in a keynote address at a London Stock Exchange Group Insight Series event, in Johannesburg on Wednesday.The Bank faced widespread criticism last month after raising its policy rate to stem inflation pressure emanating from a jump in fuel prices due to global oil supply disruptions.With expectations to cut the benchmark rate further this year following several reductions in 2025, it instead increased it by 25 basis points to 7% in May despite a weak domestic economic outlook, amid signs that higher fuel prices were driving up inflation.Ahead of the Bank’s meeting, data from Stats SA had shown that annual consumer inflation spiked to 4% in April from 3.1% in March. Governor Lesetja Kganyago defended the rate increase as necessary to keep inflation expectations anchored at low levels.Lower short-term ratesOn Wednesday, Cassim said the Sarb’s cautious stance on interest rates last year and early this year — either by cutting rates in small instalments of 25 basis points or keeping them on hold — had meant that monetary policy “was not too far from where it needed to be” when the war in the Middle East broke out in late February, triggering pandemonium on global oil markets.He also reiterated that the Reserve Bank had been correct to adopt the lower 3% target last year, abandoning its previous 3%- 6% band with a 4.5% midpoint.“Anchoring inflation expectations close to 3% will allow us to set lower short-term rates, probably closer to 6% than 7%,” Cassim said.“If investors feel unsure about the outlook for inflation, they will probably want higher yields to compensate. By contrast, if they see a clear and credible inflation-targeting framework, they can discount that risk and charge lower rates.”He recounted how the Covid-19 pandemic had led to a global surge in inflation and sharp monetary tightening, with the domestic policy rate being raised to 8.25%. Rising country risk and prolonged electricity load-shedding also pushed up long rates, with the entire yield curve shifting higher and remaining very steep. But more recently, South Africa experienced a turnaround, with both long and short rates falling substantially to below 9% and under 7%, respectively, at the start of 2026.“The Middle East crisis disrupted this progress somewhat, but steepness actually moderated further, as the inflation shock pushed up short rates more than long rates,” the deputy governor said, citing this as an example of how much “South Africa’s recent ‘macro reset’ has delivered”.“With a new inflation target, a strong fiscal commitment to stabilising debt now rather than later, plus reduced bond issuance, markets have priced in markedly lower yields on government debt,” Cassim said.“Meanwhile, ongoing fiscal and structural reforms would justify more credit rating upgrades, such as those we have seen recently from both S&P and Fitch, and improve demand for our bonds. We have already achieved a flatter and lower yield curve, and we should strive for further gains.”In late May, S&P Global affirmed South Africa’s long-term foreign currency rating at BB and local currency rating at BB+, keeping the outlook positive, a week after peer Moody’s lifted the country’s outlook to positive due to a strengthening fiscal performance and progress made on structural reforms.Earlier this month, Fitch upgraded the long-term sovereign rating by one notch to BB from BB-, citing prudent fiscal management despite weak growth and economic shocks.The ratings agencies have applauded South Africa’s commitment to reigning in its debt. In its February Budget Review, the Treasury forecast gross loan debt to stabilise at 78.9% of GDP this year before easing for the rest of the decade, reducing servicing costs over the medium term and supporting spending on public services.