Introduction Domestic inflation has moderated to lower-than-expected levels in the period since the publication of the previous Monetary Policy Review in May 2010, restrained by the relatively weak domestic demand conditions and the further appreciation of the foreignexchange rate of the rand. Economic growth was below expectations in the second quarter of 2010 and is projected to remain below potential for some time. Although household consumption expenditure has shown signs of recovery, it has continued to be adversely affected by high levels of household indebtedness, continued job losses and low levels of credit extension. Growth in the domestic economy continues to take place against the backdrop of a fragile global economy, characterised by significant risks to global growth despite fears of a reversion to recession in the advanced economies having diminished somewhat. This has meant that the abnormally low policy rates in a number of advanced economies have remained in effect and emerging markets around the world have experienced increased capital inflows as investors have adjusted their portfolios to hold more emerging-market bonds. This has had implications for the exchange rate of the rand, which has appreciated despite further accumulation of foreign-exchange reserves by the South African Reserve Bank (the Bank). The domestic inflation outlook has also improved recently, with the forecast for the targeted inflation rate being revised downwards. Inflation is expected to remain below the upper level of the 3 to 6 per cent inflation target range over the period to 2012. This improvement created sufficient space for monetary policy to provide additional stimulus to the somewhat fragile recovery of the domestic economy, allowing the repurchase rate to be reduced by 50 basis points in September 2010. As usual, the Monetary Policy Review analyses inflation developments and the factors that have impacted on inflation, followed by an assessment of recent monetary policy developments and a discussion of the outlook for inflation. Three issues are focused on in the boxes. Box 1 examines the fiscal burden taken on by some of the advanced countries at the centre of the financial crisis and the key risks for the global economic recovery of synchronised fiscal consolidation, while Box 2 reports on the recently announced changes to the Bank’s monetary policy operational procedures. Box 3 reports on research that examines the manner in which the policy rate in South Africa reacted to the inflation rate, the output gap, and the real exchange rate before and after the implementation of inflation targeting.