A Market-Based Assessment of the Outlook for Inflation Expectations and Monetary Policy in South Africa

Jens Christensen and Daan Steenkamp

No 2026-03, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: Using a novel arbitrage-free dynamic term structure model of nominal and real bond prices that accounts for bond-specific liquidity risk premia, this paper provides estimates of bond investors’ inflation expectations and associated inflation risk premia in South African sovereign bonds. The results suggest that investors’ long-term inflation expectations have gradually been declining towards the tolerance band adopted by the South African Reserve Bank in 2000. Although volatile, the estimated inflation risk premia have declined significantly since 2021, while a market-based estimate of the natural real rate has remained stable and slightly negative. A related measure of the stance of monetary policy is currently assessed to be mildly restrictive. Leveraging the estimated model’s rich dynamics to assess the outlook for these key variables suggests that expected inflation is likely to gradually fall further, while monetary policy is projected to ease towards neutral in the context of a stable natural real rate.

Keywords: term structure modeling; inflation risk; liquidity risk; financial market frictions; emerging bond markets (search for similar items in EconPapers)
JEL-codes: C32 E43 E52 E58 F41 F42 G12 (search for similar items in EconPapers)
Pages: 31
Date: 2026-02-05
Note: PDF date: January 26, 2006.
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DOI: 10.24148/wp2026-03

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