At the June meeting of the Monetary Policy Committee (MPC) of the Reserve Bank the governor said that their central inflation forecast was for further deterioration to an average level above 6.0%, the upper level of their inflation target. The major drivers were food, where the pressure was expected to persist as a result of higher global real incomes, and petrol, where the oil price had risen from US$68 at the time of the last MPC meeting to over US$70. The current level of geopolitical tension was expected to keep the upward pressure on oil. With the strong state of the economy and wage growth reported at 6.5%, the risks for inflation remained very much on the upside. This would have been exacerbated by the longest civil service wage strike in the history of South Africa, which resulted in a wage settlement of 7.5%. These factors were sufficient for the MPC to hike the repo rate by 50 basis points from 9.0% to 9.5%. The economic data reported towards the end of June showed money supply and private credit extension growth remaining high at 24.8% and 22.7% respectively.

From a global perspective, the US 10-year government bond rate increased from 4.90% to 5.03% over the month, having reached a high of 5.28% during the month. The Rand strengthened slightly relative the Dollar from R7.15 to R7.08, much in line with expectations. The CPIX came out at 6.4%, marginally up from the expected as well as the previous figure of 6.3%. PPI came out at 11.3%, up from the expected 11.2% and from the previous 11.1%.

Spurred on by the hike in the repo rate, the benchmark SA government bond rate, as represented by the R157 maturing in 2015, increased from 7.99% to 8.49% over the month.

On the money market front over the same period the three- month NCD rate increased from 9.35% to 9.70% and the 12- month NCD rate from 10.00% to 10.60%.

Looking at what is currently being priced into the market, there is every expectation that there will be a further 50 basis points hike in the repo rate at the next MPC meeting, which is scheduled for August. There is also an outside possibility that there could be still an additional hike in October.

At the current levels of money market rates one is more than being compensated for the risk of interest rates being hiked by the expected 50 basis points. We will therefore be extending the duration of the portfolio to the maximum.

Ahead of the February Monetary Policy Committee (MPC) meeting of the Reserve Bank the market participants were in general agreement that there would be no change to the official repo rate. Now, just ahead of the April MPC meeting, there are a fair number of people calling for a hike in the repo rate. The majority would, however, still be seeing the repo rate remain unchanged. A number of factors have led to this disparity in views.

The inflation numbers that came out during March were better than expected. The CPIX numbers came out at 4.9%, better than the expected 5.2% and down from the previous month's 5.3%. PPI came out at 9.5%, better than the expected 9.9% and down from 9.8%. Those seeing no change to the repo rate are arguing that the underlying inflation remains in check and even if the upper limit of the inflation target, at 6%, may be breached, it would only be for a short period of time.

Those arguing for a hike in the repo rate are saying that with the oil price that has risen from US$59.94 to US$68.08 over the month and money supply and credit extension remaining at very high levels, the inflation risks are on the upside. We know that the petrol price has risen by R0.69 which will have a negative impact on inflation! This view is further supported by GDP numbers that show that the economy is still growing very robustly. Food inflation has also been a major area of debate with upward pressure coming from maize as a consequence of the drought whereas downward pressure is being brought to bear from meat prices as a result of farmers sending greater volumes of stock to the abattoirs, again as a result of the drought.

On the international front Europe hiked their official interest rates by 25 basis points from 3.5% to 3.75% and the US 10 year government bond rate rose by 10 basis points from 4.55% to 4.65%. The Rand, while remaining volatile, was largely unchanged over the month, moving from R$7.25 to R$7.26. Locally, the benchmark three year government bond rate, the R153, rose by 21 basis points from 7.98% to 8.19% over the month.

The impact over the month of all these factors on the money market was also slightly negative. The three month NCD rate increased from 9.00% to 9.10% and the 12 month rate increased from 9.50% to 9.70%.

We are of the view that the repo rate is likely to remain unchanged at the next MPC meeting, but that the risks of a hike have increased over the past month. The forward rate agreements are indicating that there is some scope for the three month rates to decline by some 25 basis points over the next twelve months. We will continue being fully invested at the maximum duration allowable in our mandate to take advantage of the higher term rates over the risk free call rate.

Cadiz buys African Harvest Fund Managers

(12-Sep-2006)
Specialist financial services group Cadiz Holdings announced today that is has acquired African Harvest Fund Managers (AHFM) and African Harvest Collective Investments (AHCI) for R295 million from the African Harvest group of companies.