Introduction Although inflation has remained within the 3-to-6 per cent target range since the publication of the previous Monetary Policy Review in November 2006, and the inflation outlook initially improved in 2007, the perceived medium to long-term risks to the outlook have remained a concern to the Monetary Policy Committee (MPC). The challenge for the MPC in recent months has been to weigh these risks against the changing outlook. During this period, the economy entered the eighth year of the current upswing, with growth continuing at a robust pace and prospects for future growth remaining positive. From early June to early December 2006, the repo rate was increased by a cumulative 200 basis points in order to keep the monetary policy stance consistent with the achievement of the inflation target. Concerns regarding the high rates of growth in consumer demand and credit extension were compounded by the high levels of volatility in international oil prices and emerging production price pressures during this period. By the time the MPC met in February 2007, however, the outlook had, on balance, improved sufficiently to justify a pause in the upward phase of the interest rate cycle. The risks were still perceived to be somewhat on the upside but inflation outcomes, with respect to both consumer and producer prices, were below expectations, and inflation was projected to remain within the target range for the forecast period. In April, the monetary policy stance was left unchanged, although the inflation outlook had deteriorated slightly primarily as a result of less favourable developments in petrol and food prices. This Monetary Policy Review provides an analysis of recent price developments, the factors that affect inflation and the outlook for inflation. In addition, three focus topics are presented in boxes. The first box presents a discussion of recent developments in domestic petrol prices in the light of international product price and exchange rate movements. The second box discusses the role of Taylor rules in monetary policy, and the third reports on recent research into the dynamics of inflation.