Introduction Since the publication of the first Monetary Policy Review in March, there have been significant developments in monetary policy. Apart from the technical adjustment of 100 basis points in early September 2001, the repo rate has been reduced in South Africa on two occasions, by 100 basis points in July and by 50 basis points in September. This in turn led to equivalent reductions in the commercial banks' prime lending rates. In July 2001 the inflation rate as measured by the overall consumer price index excluding mortgage interest cost (CPIX) declined to the top end of the inflation target, and if this trend continues, the target of between 6 and 3 per cent on average for 2002 will be attained. Domestic factors have remained conducive to continued declines in inflation. There is little pressure coming through from domestic expenditure growth, capacity utilisation rates are not a cause for concern and increases in unit labour cost are lower than the inflation rate.Monetary policy internationally has also seen major changes. Most major central banks have eased their monetary policy stances, a trend that was evident even before the tragic events in the United States in September. This trend was intensified and more co-ordinated after these events. These changes were made in the face of a deepening global downturn, with its threat of recession. International developments have had mixed effects on the inflation outlook in South Africa. On the negative side, crises in Zimbabwe, Argentina and Turkey also impacted negatively on the rand, with potential inflationary consequences. In the aftermath of the attacks on New York and Washington, further pressure was placed on the rand. During 2000 the decline of the rand against the US dollar did not have a strong effect on inflation. The current scenario of the rand weakening against most major currencies may yet pose further challenges to monetary policy. On the positive side, however, it appears that the international slowdown is putting downward pressure on the oil price. Whether or not this trend will be sustained is yet to be seen, particularly in view of the uncertainty surrounding the US response to the terrorist attacks. A lower oil price would reduce a significant source of external pressure on inflation. In this Monetary Policy Review developments in inflation and the factors that impact on inflation are reviewed. Recent monetary policy developments are also assessed. Finally the outlook for inflation as well as the inflation forecast is presented. In addition three issues are discussed in the boxes. The first addresses the lags in monetary policy, with a focus on the time lag between a change in the repo rate and its impact on prices. The second box reviews real interest rate developments in South Africa, where trends in real interest rates are compared with those internationally. The third box provides a brief description of the new operational procedures for monetary policy.