Introduction Forecasts suggest that the inflation outlook has improved significantly, and there is evidence that inflation expectations and wage settlements are increasingly in line with the inflation target. At the same time, however, there are aspects of the inflation environment that increasingly demand caution. Continued strong consumer demand, which shows few signs of moderating, and resurgent international oil prices are particularly significant concerns. Against a backdrop of lower domestic inflation and interest rates, consumer and business confidence remain high. The strong growth in household consumption expenditure is reflected in rising household debt levels, vigorous credit extension, and the widening deficit on the current account of the balance of payments. All carry potential risks for the inflation and interest rate outlook. Furthermore, in an international environment characterised by robust global demand and persistent global imbalances, rising oil and commodity prices feature prominently. Geopolitical factors and tight market conditions suggest that the risks of oil price spikes are significant. 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, three focus topics are presented in boxes. The first box considers international trends in household debt, and discusses the factors underlying these trends and their implications. The second box reports on research into the growth rate of potential output in South Africa, and the third discusses recent proposals regarding how best to tackle global imbalances in order to ensure longer-term sustainable global economic growth.