During the quarter the SARB decided to keep the repo rate unchanged at 7%. The 3- month NCD traded in a narrow band between 6.95% and 7.05%, while the 12-month rate increased from a low of 7.10% early in August to 7.55% closer to the end of the quarter. The main driver of the longer end was FRAs as expectations of a rate cut in the next few months are less certain.

At the end of the second quarter the money market yield curve became steeper and suggested a stable money market environment at least for the next 12 months. Money market investors therefore appear to be of the opinion that short-term interest rates will drift sideways from current levels.

Sanlam Investment Management expect money market rates to stabilise at current levels.

During the second week of the quarter the SARB decided to cut interest rates by another 50 basis points. The repo rate changed from 7.50% to 7.00%, while the 3-month rate came down from 7.50% to 6.95% and the 1-year NCD from 7.90% to 7.20%. After the initial cut in interest rates the 3-month and 12-month NCD traded in a narrow range between 6.85% and 6.95% and 6.95% and 7.15% respectively.

At the end of the second quarter the money-market yield curve suggested some room for monetary easing in the short term, but it also in factored a stable money-market environment at least for the next 12 months. Money-market investors therefore appear to be of the opinion that short-term interest rates would drift sideways from current levels, although the risk is for another cut of 50 basis points in the repo rate.

Sanlam Investment Management expects money-market rates to stabilise at current levels.

With the South African Reserve Bank keeping the repurchase rate unchanged in February 2005, the short end of the money market continued to trade sideways at 7.5% (on 3-month Jibar) through most of the first quarter. There was a little more movement in the longer end of the curve, but even here the trading range was between 7.4% and 7.6% for most of the quarter.

Towards the end of the quarter, we experienced increased levels of volatility in the bond and currency markets, which started to impact on the money market curve. The 3-month rate went up to 7.6% at the end of the quarter, while the 12-month rate closed the quarter at 7.8%. It appears that most of the upward movement in money market rates was caused by a change in the funding strategy of the domestic banks. This change might have been caused by a change in the sentiment towards the outlook for domestic interest rates.

Considering the flat yield curve and the fact that we did not regard any area on the money market curves as offering particular value, SIM continued to invest in the 3-month area of the curve during the first three months of the year. This strategy proved to be appropriate, especially towards the end of the quarter when money market rates started to drift higher.

Sanlam Investment Management will closely monitor developments in the money market, as further weakness might well present good entry opportunities in the longer end of the curve, potentially the best since September 2004.

The three-month NCD, currently at 7.45%, traded mostly sideways through the fourth quarter. The SARB decided to keep the repo rate unchanged at 7.50% during the December MPC meeting. The one-year NCD traded in a narrow band between 7.45% and 7.25% during the quarter.

At the end of the fourth quarter the money market yield curve suggested some room for monetary easing in the short term, but it also factored in 1% of monetary tightening within the next two years. Money market investors therefore appear to be of the opinion that short-term interest rates are at, or very close to, the bottom and that interest rates would mostly drift sideways to higher from here.

SIM did not expect any monetary easing during the December meeting and therefore invested in the short end of the money market. We expect monetary policy to remain unchanged over the short term, although the risk is that the SARB could cut interest rates by another 50 basis points at the next MPC meeting in February 2005.