IntroductionIn September 2003 the inflation rate as measured by the consumer price inflation excluding mortgage interest cost for metropolitan and urban areas (CPIX) moved to within the inflation target of 3 – 6 per cent, and it has remained within the range since then. CPIX inflation continued its downward trend until December 2003 when it reached a low of 4 per cent, before turning moderately upwards in subsequent months. This rate was 4,8 per cent in February 2004 before declining to 4,4 per cent in March. The turnaround in the inflation trend since December 2003 was not unexpected, as a combination of base effects and exogenous factors such as higher food and energy prices were expected to push the measured inflation rate higher. Despite the upturn in inflation, the twelve-month rate of increase in the CPIX is expected to remain within the target range over the forecast period. This positive outlook is due in part to the sustained recovery in the exchange rate of the rand.The monetary policy response to the improvement in the inflation outlook was reflected in a significant decline in short-term interest rates during the second half of 2003. By the time of the publication of the Monetary Policy Review in November of 2003, the repurchase (repo) rate had been reduced by a total of 500 basis points. At the December Monetary Policy Committee (MPC) meeting, the repo rate was lowered by a further 50 basis points and no further adjustment has occurred since then.An important development in the inflation-targeting framework was the announcement by the Minister of Finance that the specification of the target range would be changed from an annual average to a continuous target. Previously the target had been specified as having CPIX inflation between 3 and 6 per cent on average for a calendar year. The target remains 3 – 6 per cent for year-on-year CPIX inflation, but it is now required that this be achieved continuously.In this Monetary Policy Review an analysis of recent price developments, the factors that affect inflation as well as the outlook for inflation, is provided. In addition, three focus topics are presented in boxes. In the first box, the implications of the change in the specification of the inflation target are discussed. The second box presents an international comparison of inflation targeting practices, and the third box analyses the monetary policy transmission mechanism.