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.

The South African Reserve Bank cut the benchmark interest rate by one percentage point to 10.5% on the 5th of February. On the 18th of March Mr Tito Mboweni announced that the MPC will meet on a monthly basis except for July. Another one percent rate cut followed on the 24th of March. These cuts were mainly due to the economy contracting. Recessions in the U.S., Europe and Japan, which together make up 60 percent of South African exports, have resulted in slashed manufacturing and mining output in SA.

Forecasts indicate that inflation will be within the 3 to 6 percent target range by the third quarter. The main risk to inflation will remain the rand.
Money market rates in the 3 month area came down from a high of 11.42 percent to 8.80 percent, while the 12 month rate came down from a high of 9.81 percent to 8.35 percent. The shape of the yield curve remains inverted in other words the 12 month rates are trading well below the 3 month rates.
SIM remained very positive during the quarter about the outlook in short term interest rates. All the maturities were reinvested in the 3 to 6 month area.

Looking forward, the 12 month rate currently at 8.35% is expensive but should come down further - although not in the same magnitude as before. We expect the yield curve to change from being inverted to being more positively sloping i.e. when further rate cuts materialise. Preferred areas of investment will still be between the 3 and 6 months areas. The next MPC meeting decision will be on the 30th of April 09 and we expect a 50 basis points cut in the Repo rate.

The South African Reserve Bank cut the benchmark interest rate by a half percentage point on 11 December - the first reduction in more than three years. This interest rate cut resulted mainly due to some positive movements in the major drivers of the money market. Firstly, inflation slowed a third consecutive month in November - assisted inter alia by plunging oil prices - and easing to an annualised rate of 12.1%, while economic growth slumped to a decade low. The global oil price has dropped 61 percent since the beginning of September, prompting the government to further cut petrol prices by 18 percent at the beginning of 2009 (even as the rand weakened). Forecasts suggest that inflation will be within the 3 percent to 6 percent target range by the third quarter of 2009. Private Sector Credit rose at an annual rate 15.3% last month, the slowest pace in almost four years as higher interest rates curbed consumer spending and economic growth. The domestic currency will, however, remain a major risk to inflation.

Money market rates in the three months area came down from a high of 12.32% to 11.42%, while the twelve 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 twelve 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 believe that 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 twelve month rate at 9.81% is expensive but should come down further, although not in the same magnitude as before. Expect the curve to change from being inverted towards 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 the12th of February 2009 and we expect a cut of 50 basis points in the Repo rate.