The SARB elected to hike the repo rate (the rate at which the central bank lends funds to commercial banks) by 100 basis points to 13.5% during September. The accumulated tightening during 2002 now stands at 400 basis points. As a result of tighter monetary policy money market interest rates continued to trend higher through the course of September with the 3-month NCD rising by 55 basis points to close the month at 13.1%. The 12-month NCD rose to 14.05% from 13.55% at the end of August.

Analysts are divided over whether the SARB will continue to tighten its monetary stance. It appears though that banks are able to raise sufficient funding at current rates and this in turn implies that institutional investors are generally of the opinion that interest rates are high enough to ensure a declining trend in inflation through the course of 2003. SIM is also of the view that official interest rates will remain unchanged during the remainder of 2002 and our analysis suggests that the 3-month NCD should stabilise around the 13.4% level.

Apart from the level of the money market curve, we’ll also closely monitor changes in the shape of the curve. Our expectation is that the curve should flatten which would imply that institutional investors are beginning to increase the duration of their money market portfolios. SIM has already started to invest in the longer end of the money market, but has room to increase the market risk further, should the interest rate outlook become clearer.

The money market curve flattened substantially during May, with the 3-month area of the curve opening and closing the month around the 10.80% level and the 12-month area rallying down from an opening of 11.45% to close at 11.15%.

On a monthly compounding basis the money market curve has turned inverse, which is a bullish signal for investors.

Recent developments in the money market are in line with SIM's view that the official lending rates of banks may come down during the first month of the third quarter of 2001.

The domestic money market continued to trend lower during September with the three-month NCD trading down from 9.75% at the end of August 2001 to 9.2% at the end of September. The rate on the one-year NCD fell from 9.75% to 9.4% during the month, implying a steepening of the money market curve after the last interest rate cut. This is a typical development after an easing in monetary policy. However, the sharp depreciation of the South African currency certainly also weighed on the money market towards the end of September.

The domestic money market traded at its lowest level since 1987 in September.