During the quarter, the SA Reserve Bank decided to cut its benchmark interest rate by 50 basis points (bps) from 7.5% percent to 7% in mid- August. On September 22 the Monetary Policy Committee (MPC) decided to leave the repo rate unchanged at 7%.

Risks to the inflation outlook remain fairly evenly balanced and, given the current monetary policy stance, inflation is expected to continue moderating to within the inflation target range next year.

Money market rates in the three-month area of the yield curve came down from a high of 7.58% to 7.02%, while the 12-month rate came down from 8.4% to 8.17%.

SIM remain neutral on the outlook for short-term interest rates and invested all money market maturities in the three and 12 month area of the curve. Floating rate notes were included in the portfolios to enhance portfolio returns.

Looking forward, the 12 month rate - currently at 8.17% - is attractive. We expect no major changes in the yield curve over the next quarter. Our preferred areas of investment are between three and six months. We will consider including floating rate notes that reset at three-month Jibar and which are currently trading at a spread of 80 bps. Corporate credit trading at Jibar plus a spread could also be considered to enhance returns of money market portfolios. The next MPC meeting decision will take place on October 22 and we expect the repo rate to remain unchanged.

During the quarter, the South African Reserve Bank cut its benchmark interest rate by one percentage point to 8.5% at the end of April and by a further one percent to 7.5% in late May. On June 25, the Monetary Policy Committee (MPC) decided to keep the repo rate unchanged at 7.5%. These interest rate cuts were primarily a result of the economic contraction, slower private sector credit extension and easing money supply data. According to our estimates, inflation will only fall within the 3% to 6% target range by the second quarter of 2010, as services inflation remains sticky. The main risk to inflation will remain the rand.

During the quarter, money market rates fell from highs of 8.8% to 7.5%, while the 12 month rate remained unchanged at 8.35%. This meant the shape of the yield changed dramatically from an inverted curve towards a more positively sloping curve during the quarter.

SIM remain neutral on the outlook for short-term interest rates during the quarter, investing only in maturities of between three and six months.

Looking forward, the current 12 month rate of 8.35% is attractive. We expect no major changes in the curve during the next quarter. Preferred areas of investment will be between three and 12 months. We will consider including floating rate notes that reset at three-month Jibar, which are currently trading at a spread of 60 basis points. The next MPC meeting decision will take place on August 13 and we expect the repo rate to remain unchanged, although a case could be made for another 50 basis point cut.

Money market yields came down across the curve. Three-month Jibar yields fell from 9.75% to 8.81%, while the one-year Jibar rates declined from 8.49% to 8.35%. Rates came off in response to the one percentage point cut in the repo rate after Reserve Bank Governor Tito Mboweni announced a surprise change in the Monetary Policy Committee meeting dates in late March after weaker-than-expected growth figures were announced.

Looking forward, MPC meetings will take place every month except for July and we expect the Reserve Bank to lower the repo rate from 9.5% to 9% at the next meeting on April 30.
During the month, most investments were made in the three-month to six-month area of the yield curve. Longer term assets were included in the fund to take advantage of the higher yields and to protect investors against reinvestment risk, while a minimum balance was kept in the current account. High quality credit was included to take advantage of the higher yields available.

The South African Reserve Bank cut the benchmark interest rate by half a percentage point on 11 December - the first reduction in more than three years. This cut was mainly to the result of some positive movements in the major drivers of the money market. Firstly, inflation slowed for a third consecutive month in November, assisted inter alia by plunging oil prices, and eased to an annualised rate of 12.1%, while economic growth slumped to a decade low. The global oil price has dropped 61% since the beginning of September, prompting the government to cut petrol prices by a further 18% at the beginning of 2009 (even as the rand weakened). Forecasts suggest that inflation will be within the 3% to 6% target range by the third quarter of 2009. Private sector credit rose at an annual rate of 15.3% last month, the slowest pace in almost four years, as higher interest rates curbed consumer spending and economic growth. However, the domestic currency will remain a major risk to inflation.
Money-market rates in the three-month area came down from a high of 12.32% to 11.42%, while the 12-month rate came down aggressively from a high of 13.17% to 9.81%. The shape of the yield curve changed from positive sloping at the beginning of the quarter to inverted at the end of the quarter, i.e. the 12-month area rates are trading well below the three-month area rates.
SIM remained very positive during the quarter about the outlook for interest rates and we believe the SA Reserve Bank will cut the repo rate by 50 basis points at each MPC meeting during 2009. A barbell strategy was followed during the quarter, maturities being reinvested in the short end to provide liquidity and in the long end of the yield curve to protect clients against reinvesting at regular intervals at lower yields.
Looking forward, the current 12-month rate of 9.81% is expensive but should come down further, although not to the same extent as before. Expect the curve to change from being inverted to becoming more positive sloping when rate cuts do materialise. Preferred areas of investment will be between six and nine months. The next MPC meeting decision will be on 12 February 2009 and we expect a cut of 50 basis points in the repo rate.