During the quarter, the South African Reserve Bank kept the Repo rate unchanged at 12% due to an improved medium-term inflation outlook and expectations that growth would slow to below potential.

On the economic front, producer price inflation of 19.1% and consumer price inflation excluding mortgages (CPIX YoY) of 13.6% came out higher than expected. However, the trend in short-dated instruments became more positive as we are getting closer to the top of the inflation rate cycle. Three month Jibar rates moved down from 12.37% to 12.05%, while the 12-month rate decreased from 13.85% to 12.50%. Looking forward, the three month forward rate is discounting a very good possibility of interest rates remaining unchanged in the near term and then starting to come down in the second half of next year, with more interest rate cuts to follow. The next monetary policy committee (MPC) meeting decision will be on the 9th of October. Our expectation is for the Repo rate to remain unchanged at 12%, with the prime rate at 15.50%. During the quarter, we increased the duration on money market portfolios by increasing our percentage holding in the one year area to take advantage of the higher yields available, while keeping a minimum balance in the current account.

During the last quarter of 2007, the South African Reserve Bank decided to increase the Repo rate twice. During the October MPC meeting the Repo rate was increased from 10% to 10.50% and in December it was increased again to11%. Inflation still remains the main concern.

Jibar rates in the 3 months area increased from 10.30 % to 11.25%, while the 12 month rate increased from 10.93% to 11.94%. This was mainly due to the increase in the Repo rate. Unlike the previous quarter the movements were more or less the same across the curve.
The 3 month forward rates imply that the Repo rate is expected to remain unchanged at 11% while the long term forwards suggest that we could see some relief over the next 12 months.
Looking at the money market spot curve though, it indicates some risk of another Repo rate increase. The next MPC meeting decision will be on 31st January but our expectation is that the Repo rate will remain unchanged.

Major maturities were invested in the short end of the yield curve. In order to take advantage of the higher yields and simultaneously keeping a minimum balance in the current account, a small portion was invested in the 1 year area.