Introduction Over the past few months, the world economic slowdown has continued unabated,and global geopolitical uncertainties have contributed to the turbulence in international financial markets. Although the conflict in Iraq is seen as a major cause of the continued slowdown, it is unlikely that a resolution of this conflict will solve the underlying growth problems in industrialised countries. A number of industrial country central banks, including those in the United States of America, the United Kingdom and the euro area, have responded by easing monetary policy further, and fears of deflation rather than inflation tend to predominate. Despite this low inflation international environment, uncertainties regarding the impact of the war in Iraq on the global outlook and the international oil price remain a cause for concern. Against this turbulent international background, the South African economy has proved to be remarkably resilient. The 3 per cent growth rate achieved in 2002 was high by international comparison, and should be seen in the context of the weak international economy and the monetary policy measures taken to deal with inflationary pressures caused mainly by the weakness of the rand in late 2001. During 2002 the interest rate was increased on four occasions by 100 basis points each time. However, at the time of the Monetary Policy Committee (MPC) meeting in November, there were indications that the inflation rate had peaked and it was decided to keep the repo rate unchanged. Although the outlook for inflation improved further during the first quarter of 2003, at the March meeting of the MPC the interest rate was put on hold pending confirmation of a sustained downward trend in inflation. The MPC was particularly concerned about wage developments which could have a negative impact on inflation. Monetary policy was also affected by the decision of the Minister of Finance to modify the inflation targets for 2004 and 2005. In 2001 the targets for these years were set at 3 – 5 per cent. However, the sharp increase in the inflation rate in 2002 meant that achieving this lower target range within the original timeframe would put excessive pressure on the economy. In October 2002 the Minister announced that the inflation target would remain at 3 – 6 per cent for 2004. Subsequently it was announced in the February 2003 Budget that the target would remain at 3 – 6 per cent for 2005 and that the target for 2006 would be announced in October 2003. This Monetary Policy Review provides an analysis of recent price developments, the factors that affect inflation as well as the outlook for inflation. In addition, four focus topics are provided in boxes. The first inflation target was set for 2002, and the inflation outcome for that year was above the target range. Box 1 restates the MPC view of the reasons for the target being missed. Food prices were a significant source of inflation during 2002 and developments in this area provide a good indication of the future direction of inflation in general. Box 2 analyses recent trends in spot and futures prices of grain and their implications for food prices. The recently announced exchange control amnesty has focused attention on the possible impact of the amnesty on the exchange rate and tax revenues. Box 3 provides a brief review of international experience with such amnesties. Box 4 considers the implications of the revision of the targets for the credibility of the inflation targeting framework.