For the quarter under review, the Reserve bank left its benchmark interest rate unchanged at 5.5 percent, in line with market expectations. On the contrary, however, there seems to be growing sentiment for the Monetary Policy Committee to pursue more accommodative measures, to stimulate domestic growth in the wake of further global economic pressures experienced in the Euro-zone as well as the United States of America. At the September MPC meeting governor Gill Markus stated that a rate cut had been discussed. However, following the Rand depreciation of 18 percent during the last quarter, it's worst performance since 2001, such discussions were abated due to the effect of such a depreciation on the inflation trajectory.

Sustained Rand weakness will prevent further rate cuts; however, if the oil price continues to decline and global food prices follow the same trend, the resultant inflation projection would allow the SARB sufficient room to cut rates, buoyed by the current state of the ailing domestic economy. South Africa is likely to see GDP growth of around 3 percent this year, but the high unemployment rate of above 25 percent remains a concern.

GDP growth in quarter three is likely to remain benign. The Kagiso PMI (an indicator of manufacturing activity) increased to 50.7 in September, albeit positive, the employment index remains below 50. CPI inflation was unchanged at 5.3 percent, but Producer price inflation gathered momentum to record a print of 9.6 percent.

The Forward-Rate Agreements (FRAs) continue to assign a high probability of a rate cut at the November MPC. Gill Markus has made mention of the fact that the Euro-zone crisis will take a considerable period of time to recover and for the economic region to gather thrust, further supporting the stance for further economic stimulation. However, the STANLIB view is that interest rates will remain flat for a prolonged period of time.

Fund Review
For the quarter under review, the Reserve bank left its benchmark interest rate unchanged at a 30-year low of 5.5 percent for a second consecutive meeting. The decision to keep rates on hold was predominantly in line with market expectations. Governor Gill Markus stated that "while the core function and responsibility of the Reserve Bank is tackling inflation", it would be done in a considered manner, bearing in mind the fragile character of the economy at present.
According to the forward-rate agreements, investors expect the Central Bank to raise the benchmark interest rate in December. The Reserve Bank has revised the estimate of the average inflation rate for 2011 from 4.6 percent to 4.7 percent, and to reach 5.7 percent in 2012. The Central Bank cited that the surging food and oil prices will threaten to push inflation outside the target range of 3 percent to 6 percent. PPI accelerated to its highest level since September 2010 at 6.7 percent in February, while the Private Sector Credit Extension data continued its upward trajectory to 5.1 percent in February, after remaining flat for several months.

Looking Ahead
The growing market consensus dictates that interest rates will be hiked in the last quarter of this year. The longer end of the Money Market curve has adjusted to the increased inflationary pressure within the economy and therefore Prime linked notes and short dated instruments hold a more favourable position, due to future upside inflationary risk.

For the quarter under review the repo rate was cut by a further 50 basis points at the November MPC meeting. This rate cut was in line with market expectations. In total rates have been cut by 650 basis points since December 2008. The Reserve Bank has however commented that the scope for further downward movements in rates is seen to be limited. Market expectations are that rates remain on hold for 2011.The upside risks to inflation are higher administered prices, wage increases and intemational food prices. The Reserve Bank is expecting these risks to be contained for the short term.

Money market rates are flat from the three month area out to the one year area. With the risk of negative inflation surprises in 2011, floating rate notes and prime link notes are offering the best value.