The quarter under review, June to September, saw a 25 basis points rate hike at the July MPC meeting. In making this decision the Reserve Bank stressed that it is the Reserve Banks mandate to manage inflation. According to the Reserve Bank the upside risks to inflation had become uncomfortably high. The Reserve Bank had to weigh up rising inflation in a weak domestic economic environment and with no improvement in the outlook. At the September MPC meeting rates were kept on hold even with a weakening Rand.

The Reserve Bank stressed that their policy choice was extremely difficult- managing inflation in a weak economic environment. It appears that the rate of normalising of interest rate in South Africa will be at a relatively gradual pace. After the MPC meeting Gill Marcus announced that she will not be extending her term as Governor after November 2014. The Rand reacted to this announcement by weakening to R11.30 against the US dollar. Gill Marcus has been considered a competent and transparent Governor through her term both locally and globally. The Rand remained weak up until the end of September due to delays by the Government in announcing the new Reserve Bank Governor.

Due to Rand weakness the one year NCD rate closed quarter end at 7.30%. Money market funds remain cautious, focusing investments on the short end of the yield curve.

The primary performance objective of the portfolio is to obtain as high a level of current income as is consistent with capital preservation and liquidity. Capital gains will be of an incidental nature.

Minimum South African Exposure: 100.00% of the portfolio,
Maximum Foreign Exposure: 0.00% of the portfolio,
Tenor of any one asset: Maximum 12 months,
Weighted Average Duration of portfolio: Maximum 90 days.

This portfolio may not have any direct and/or indirect foreign exposure.

Much of the economic sentiments expressed in Q1 of 2014 seem to have changed in Q2, as the effects of the ongoing platinum sector strike continued to weigh heavily on local growth. During the quarter under review (Q2), rates were left unchanged citing low growth and consumer indebtedness as the reasons behind the decision. The pronouncements made in Q1 by SARB governor Ms Gill Marcus were based on the view that, inflation was expected to breach the (3%-6%) target band on a temporary basis at the end of Q2 and only to moderate back into the target band in Q1 of 2015. The current environment of rising inflation and low growth, poses a problem for the SARB when making monetary decisions. The effects of a weak local currency impacted on inflation numbers in the month of April with CPI posting 6.1% and May 6.6%.

The Rand remained volatile but improved, as AMCU signed a wage agreement which marked an end to its 5-months long strike, and a better than expected current account deficit which narrowed to -4.5% of GDP against consensus of -6.3% of GDP. International sentiments in the developed markets continue to drive local currency movements. ECB remains accommodative, as interest rates were cut to an all-time low of 0.15% while the bank deposits rates were cut to -0.10% as measures to boost the Euro zone economy.

Q1 GDP number contracted to 0.6% mainly as a result of the costly wage strike in the platinum sector. With the Kagiso PMI numbers for the three months to June all printing below the 50 Level mark, this proves that the economy is still contracting. Growth is expected to remain subdued for the remainder of the year driven by weak domestic demands, a high current account deficit and electricity supply shortages affecting production levels. Rating agencies downgraded SA's long term foreign currency rating, with S&P downgrading SA from BBB to BBB- with a stable outlook leaving SA rating one notch above junk status, while Fitch downgraded SA from BBB to BBB- with a negative outlook, this will all contribute to raising SA's borrowing costs.

Longer dated NCD rates traded in a tight range of 6.85% to 7.05% during the second quarter, tracking the movements of Rand. FRA rates moved higher, and are now discounting more Repo rate hikes in the future. Money Market trading remained mostly in the shorter end of the curve, as cash was kept mostly on call to provide for mid-year /quarter end.

During the quarter under review there have been two MPC meetings. The Repo rate was unexpectedly hiked by 50 basis points at the January meeting. This hike was a pre-emptive measure to a depreciating Rand and deteriorating inflation outlook .Inflation is expected to breach the upper end of the target range in the second quarter of 2014. The Governor also cited concerns around the spill over effects to emerging markets from The Fed's pace and quantity of QE tapering. The Governor reiterated that the growth outlook for the South African economy still remains a concern and although the unemployment rate remains high, however, the primary responsibility of the Central Bank has to be seen as keeping inflation under control.

After the Repo rate hike the FRA (forward rate agreement) market predicted the possibility of a total of a two hundred basis points hikes in a year's time. The Governor made numerous comments following this market reaction, stating that the markets were overreacting. One year NCD rates reached a level of 7.30% soon after the MPC announcement, but since have dropped back to 6.80%.

At the March MPC meeting the Repo rate was kept on hold .The governor commented that the Rand remained volatile from the last interest rate meeting, however, the trend has been an appreciating one over this period. The inflation outlook due to the stronger Rand moderated from the January MPC meeting, however, the risks to inflation are still to the upside. The Governor again re-iterated the Monetary Policy Committees' dilemma of managing rising inflation pressures in a subdued growth environment. The Governor's pace and increments of tightening will depend on a number of factors including projected inflation, inflation expectations, the state of the economy and global developments. The market will therefore look closely at any data going forwards for direction on interest rates. The Governor did mention in the press conference afterwards that the committee vote was not unanimous on an unchanged Repo rate decision. Stanlib expects a further 50 basis points of rate increases during the rest of 2014. It is likely that these increases will be in two tranches of 25 basis points each.

The money market funds will trade cautiously going forward, and favour floating rates notes in an environment of increasing interest rates.

The Standard Bank Money Market Fund will change it's name to STANLIB Money Market Fund, effective from 18 February 2014