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.

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 SIM's expectations. The 12-month area of the curve continued to come in 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 is coming closer. 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.

SIM expects 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. SIM's 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.