Executive summary:South Africa’s monetary policy has provided stability through a period of unprecedented global and domestic uncertainty. Looking beyond the recent temporary breach of the upper limit of the inflation band, the Bank’s medium-term forecast projects inflationary pressures to moderate alongside a gradual economic recovery. From 2015, the output gap – the difference between the potential growth rate of the economy and its realised rate of growth – should slowly narrow. Subdued but improving global economic growth will lend some medium-term stability to oil and commodity prices. The value of the rand is expected to remain range-bound but volatile, consistent with the ongoing high level of uncertainty in the global economy. The monetary policy stance has remained stable as reflected by the unchanged low repo rate of 5 per cent per annum. Although inflation is expected to remain within the target range, the MPC has become increasingly concerned about upside risks to the forecast.The primary challenge to price stability lies in the volatility of food and petrol prices, which is exacerbated by exchange rate movements. Higher inflation outcomes have resulted in a gradual rise in inflation expectations, which remain uncomfortably close to the upper band of the target range. However, in line with the Bank’s forecasts, these are expected to moderate alongside headline inflation over the medium term. A sustained divergence between the Bank’s forecasts and expectations would raise concerns about the anchoring of inflation expectations.Rand depreciation continues to be the main upside risk to the domestic inflation outlook, although the pass-through from currency movements to headline inflation has proven to be relatively muted since the onset of sustained depreciation in May 2011. Core inflation, however, has tracked higher and is the focus of heightened scrutiny. Stronger second-round effects from depreciation and sharp increases in unit labour costs would have significant and negative effects on the inflation outlook. These developments reinforce the policy dilemma amid the weaker growth outlook. A significant deterioration in the risks to the medium-term inflation outlook may necessitate appropriate action to anchor inflation expectations.