Money market rates declined during October when the Reserve Bank eased its lending rate by 150 basis points to 8.5%. The 3- month rate fell by roughly 120 basis points to 8.0% while 12- month Jibar (the Johannesburg inter-bank ask rate) fell by 110 basis points to 7.7%. From the shape of the money market curve it would seem that investors expect further easing from the SARB over the next 6 months, albeit by less than 100 basis points.

Domestic money market interest rates continued to trade lower in September in response to a surprise 1% easing in monetary policy. However, most of the movement occurred at the short end of the curve with the rate on the 3-month NCD falling by 120 basis points to 9.2% during the month. The rate on the 12-month NCD fell by 80 basis points to 8.8% suggesting that money market investors anticipate more easing within the next 6 months.

With the SARB lowering its repo rate by 150 basis points during June, we also saw a sharp decline in money market interest rates. Indeed, the rate on the three-month NCD fell from 13.07% at the end of May 2003 to close the month at 11.56%, while the twelve-month NCD rate fell by 210 basis points to close at 10.07%. The fact that the longer end of the curve rallied more than the shorter end is quite bullish as it suggests that there is a good change of further rate cuts during the year.

SIM expects money market rates to stabilise around current levels in the foreseeable future, but our analysis also suggests that the SARB will have room to ease its monetary policy further during the latter part of the year. We therefore expect the money market to continue to grind lower during the next 12 months.

Although SIM is positive about the medium-term outlook for interest rates, the market has already discounted a very positive interest rate outlook and SIM will take this into consideration when constructing its money market portfolios.

With the South African Reserve bank seemingly not in a hurry to change its monetary stance (and probably rightly so!), money market rates did not change much during the month. Three month Jibar (Johannesburg Inter-bank Ask Rate) hanged around 13.4% while twelve month Jibar declined marginally to 12.91% from 13.03% at the end of February.

The slightly increased curve inversion we saw during the month probably suggests that we are coming closer to the first rate cut. Indeed, it is only the area between 1 month and 3 months were the domestic money market curve is still positively sloped (the 1 month NCD rate is at 12.94% while the 3 month NCD rate is at 13.28% on a monthly compounding basis) which suggests that the first interest rate cut should come towards mid-2003. SIM's fundamental analysis suggests that a rate cut within the next 3 months is indeed possible.

SIM expects to see money market rates starting to move down during the course of the second quarter (by roughly 100 basis points) in anticipation of a looser monetary stance by the SARB.

The short end of the money market traded sideways during December 2002 with the 3-month Jibar rate remaining unchanged at 13.47%, in line with our expectations. The 12-month area of the curve continued to shorten during the month with 12-month Jibar falling from 13.32% at the end of November 2002 to close the year at 13.02%.

The change in the curvature of the money market curve suggests an easing in monetary policy. In line with the expectation of lower interest rates (on a 6-month investment horizon) institutional funds are shifting their attention to the longer end of the money market curve in order to hedge their investment portfolios against having to re-invest maturing assets at lower interest rates. Re-investment risk is a phenomenon that we have often highlighted in these comments.

We expect the SARB to cut its repo rate by 200 basis points during 2003 with the first 100 basis point cut expected towards the middle of the year. Our view is therefore not materially different from the conventional view in the market, although there may be some timing differences. Our money market portfolios have therefore invested heavily in the longer end of the curve and the duration of all the portfolios is high compared to the benchmark.

During November we saw quite a bullish buildup in the money market with the 3M CD's trading sideways around 13.6% (3M JIBAR remained rock-solid at 13.47%) while the long end of the money market rallied. The 12M CD traded down to 13.3% from 14.0% at the end of October suggesting that investors started to place money further out on the curve in order to hedge their investment portfolios against reinvestment risk. On a monthly compounding basis the curve already flattened during October and the continuation of this trend during November is encouraging.

With the central bank expected to cut its repurchase rate by 200 basis points during the course of 2003, there should be more room for the longer end of the money market to rally towards year-end. We do not expect much action in the short end though, implying and even more inverted money market curve. Indeed, it is entirely possible for the 12M CD to trade 100 basis points under the 3M CD (on a NACM basis) at year-end.

The stability at the front end of the South African money market curve, especially against the backdrop of falling international interest rates, is creating a favourable environment for the South African currency to gain back some of the ground lost during 2001. To the extent that domestic banks are making losses on their dollar holdings (against ZAR-denominated liabilities) it is entirely possible to see slight upward pressure on the front end of the curve with the ZAR appreciating against other major currencies. In many ways South African investors are currently faced by the exact opposite of the situation experienced during November and December 2001 (when the curve became more positively sloped).