IntroductionOver the past few months inflation pressures in South Africa continued to increase unabatedly. Initially these pressures emanated from the sharp depreciation of the exchange rate of the rand in the second half of 2001. This fed through primarily to food prices. Earlier on in the year, therefore, the debate around monetary policy focused on the efficacy of higher interest rates in dealing with external shocks. The view of theReserve Bank was that the main role of monetary policy under such circumstances was to guard against possible second-round effects, and to prevent the higher food price inflation from influencing inflation expectations and other wage and price decisions.During the course of the year, it became clear that inflationary expectations were becoming increasingly entrenched and that wage settlements were trending higher. Equally disturbing was the fact that the higher inflation was no longer a food price phenomenon, and was becoming more generalised. Despite indications that the inflation environment was becoming more favourable in June, these expectations were subsequently dashed as the CPIX continued to increase, the production price index resumed its upward trend in July after a dip in June, and the exchange rate again became vulnerable. Furthermore, the threat of a United States attack on Iraq has contributed to continued high oil prices.The result of these developments has been that since the publication of the previous Monetary Policy Review in April 2002, the repo rate has been increased further in June and September, on both occasions by 100 basis points. This has brought the cumulative increase for the year to 400 basis points, and demonstrates the resolve of the Bank to bring the inflation rate back within the target range for CPIX. Despite these actions, and although the forecasts show that the target for 2003 can be attained, there are nevertheless a number of factors which impart a significant upside risk to the achievement of the target.The Monetary Policy Review provides an overview of recent inflation trends, as well as the factors that have impacted on inflation. This is followed by a discussion of recent monetary policy decisions, as well as a review of inflation expectations. Finally, the results of the Bank’s forecasts are presented. As usual there are a number of boxes highlighting topical issues. The first box briefly touches on the question of how inflation affects different income groups. In line with the Bank’s commitment to greater transparency, the second box describes the Monetary Policy Committee’s decision-making process, and the third box describes the issues and process involved in setting the inflation targets.