During the second quarter the interest rate outlook started to change with the level of the money market curve shifting higher - the 3 month NCD rate closed unchanged at 8.2% - while the overall curve became more positively sloped with the 12 month NCD trading up to 9.05% from 8.8% at the beginning of April. Purely based on the reshaping of the money market curve during the quarter, it would seem that the probability of a moderate tightening of monetary policy during 2004 has increased. Certainly, the odds of further monetary easing, at least in the short and medium term, seem very remote.

SIM increased the duration on all money market portfolios too take advantage of the positive slope of the current money market curve. This strategy contributed to a slightly higher yield, but it also added some market risk to the portfolios.

Following the 50 basis point rate cut by the SARB during December 2003, the short end of the money market traded below 8% at the beginning of January 2004. However, the overall curve had already adopted a positive slope, with the 12 month NCD trading at 8.25%, some 30 basis points higher than the 3 month NCD rate. Expressed on a quarterly compounding basis the money market yield curve was rather flat at the start of the quarter, suggesting no change to money market interest rates - read monetary policy - during 2004.

Through the course of the first quarter the interest rate outlook started to change with the level of the money market curve shifting higher - the 3 month NCD rate closed the quarter at 8.2% - while the overall curve became more positively sloped with the 12 month NCD trading up to 8.8% at the end of March. Purely based on the reshaping of the money market curve during the quarter, it would seem that the probability of a moderate tightening of monetary policy during 2004 has increased. Certainly, the odds of further monetary easing, at least in the short and medium term, seem very remote.

SIM's money market portfolios had a low duration at the start of the quarter and as the market factored in monetary tightening, we also stared to invest in the longer end of the money market curve i.e. we increased the duration of the money market portfolios. This strategy contributed to a slightly higher yield, but it also added some market risk to the portfolios.

With measures of domestic inflation declining through the fourth quarter of 2003, the SARB had room to lower its repo rate by 150 basis points in October 2003 and by a further 50 basis points during December 2003. The additional 200 basis points of easing brought the accumulated easing for 2003 to 550 basis points since mid 2003 and resulted in the repo rate falling to 8% by year-end, the lowest level since its introduction in 1998.

The two rounds of monetary easing during the final quarter of 2003 resulted in a 145 basis point rally in the three month area of the money market yield curve, to 7.72% at year end, and a 100 basis points rally in the one year area of the curve to 7.84%. The money market yield curve became flatter as the level of money market rates shifted lower, suggesting that money market participants see limited scope for further monetary easing beyond the fourth quarter of 2003.