The last quarter saw interest rates being kept on hold; this was in line with market expectations.

At the last MPC meeting the Governor made mention that the risks posed to the global and domestic economy from the crisis in Europe has intensified. The Governor also indicated that the Reserve Bank would watch closely for any impact from global events on domestic growth, which has continued to remain subdued. April's inflation number was better than expected and moved back within the target range to 5.7% year on year. Looking forward into the next quarter, the market is likely to still be affected by the events in the Euro zone which may have implications for volatility. With Greece out of the radar for a little while, markets may continue to benefit from increased confidence. Domestically, subdued growth and contained inflation are likely to see the Reserve Bank keep interest rates on hold for an extended period of time. A rate cut however is not entirely out of the question if domestic growth posts worse than expected numbers. Monetary policy will continue to be accommodative for a considerable length of time. The Reserve Bank will also continue to take into account Rand volatility when making interest rate decisions.

The FRA market is discounting the possibility of a rate cut going forward, which has caused the one year NCD rate to come off from 6.23% to closing the quarter at 5.90%.Currently floating rate notes offer good value in the money market space.

For the quarter under review, the Reserve Bank left its benchmark interest rate unchanged at 5.5 percent, in line with market expectations. However, the Governor of the Reserve Bank's most recent comments reiterate the fact that inflation remains the core objective of Monetary Policy, and that stubbornly high inflation will not be tolerated.

Sustained rand weakness coupled with higher petrol prices continues to have a negative impact on inflation expectations. However, the annual rate of inflation eased to 6.1%y/y in February from 6.3%y/y in January 2012. Nevertheless, the risk remains to the upside, with the increased price of oil and administered prices and their knock-on effects yet to filter through the broader economy.

GDP growth in the fourth quarter of 2011 printed 3.2 percent, slightly better than the market forecast of 3.1 percent. The Kagiso PMI (an indicator of manufacturing activity) decreased slightly to 55.1 in the month of March from a previous rise of 57.9 in February, confirming the moderate growth outlook for 2012.
At quarter end Forward-Rate Agreements (FRAs) assign a 38 percent probability for a rate hike at the MPC committee meeting in May. STANLIB expects that the Reserve Bank will continue to leave the Repo interest rate unchanged for the remainder of 2012; however, core inflation remains the gauge for future interest rate movements.

For the quarter under review, the repo rate was kept unchanged; this was in line with market consensus. The Governor made mention of inflationary pressures and that inflation is likely to peak at around 6.3% in the first quarter of 2012 and is then expected to return within target range in the final quarter of 2012. Inflation pressures emulated mostly from food prices and from high administered prices, thus inflation is of a cost push nature and not demand driven. The monetary Authorities have thus expressed a degree of tolerance to higher inflation. As a result of the debt problems in the Euro Zone the Reserve Bank has also revised growth forecasts down for the South African economy for 2012.This will result in a balancing act for the Reserve Bank going forward to manage inflation with low GDP numbers. The risks to inflation remain on the upside due to cost push pressures.

The Forward Rate Agreement (FRA) curve remains flat, thus predicting rates to remain on hold for the better part of 2012. Market consensus mirrors this view. The money market curve is flat with very little value on a nominal basis between the three month NCD rate and the one year NCD rate.

With the possibility of the repo rate remaining unchanged for the better part of 2012 and with flat money market rates, floating rate notes continue to offer the better value. All STANLIB's money market funds are positioned to take advantage of short term lack of volatility.