Introduction Inflation targeting was formally introduced in South Africa in February 2000. The year turned out to be particularly challenging for the new monetary policy framework, given a number of developments on the international front in particular. Oil price movements and the depreciation of the rand exchange rate in the course of the year placed upward pressure on the inflation rate. Domestic economic developments, however, provided a more benign environment for countering inflation. By the beginning of 2001, the picture had changed significantly. Although the oil price appeared to have stabilised and domestic economic activity was improving, the sudden sharp decline in United States economic growth greatly increased uncertainty about the international outlook. The challenge for monetary policy has therefore been to bring about price stability in a changing economic environment. This Monetary Policy Review is part of the Reserve Bank's attempt to broaden the understanding of the aims and conduct of monetary policy. As this is the first Review, it begins with a brief overview of some general issues relating to inflation targeting and some of the implications of this framework for monetary policy. This is followed by an analysis of the determinants of inflation and an assessment of monetary policy actions over the past year or so. The final section contains an overview of the outlook for inflation.