Whose default is it anyway? Recession fears have surfaced in developed countries while prospects for economic growth in emerging countries appear to be positive, albeit slower than previously anticipated. The global growth outlook is not much improved over the quarter as risks remain from the West and Eurozone debt policies. The Governor's address after the last MPC meeting highlighted the focus on domestic growth rather than upside inflation risks, implying that rates will remain on hold as long as domestic growth figures remain weak.

Inflation signals remain cost-push in nature and inflation was unchanged at 5.3% y-o-y. The main contributors were fuel, food and administered prices, with CPI for total administered prices at 11.9% y-o-y and CPI for food and beverages at 7.3% y-o-y. Headline CPI is still expected to exceed 6% briefly in 2012, and should decrease into target range once base effects wear off. PPI continued to be ahead of forecasts, increasing to 9.6% y-o-y from 8.9%. Increases in commodity and agricultural prices were the main contributors to the PPI inflation figure. Risks to this inflation outlook exist from current and future rand movements, pressure on commodity prices going forward and an uncertain global growth outlook.

Growth in the money supply increased to 6.2%, improving from 5.6% in August and signalling a possible reversal in the year's downward trend. PSCE increased to 6.1% y-o-y, ahead of market expectations and trending upwards over the quarter. PSCE figures showed improvement in corporate credit demand, which had stronger gains while households demand for credit eased further from previous figures. Support for credit demand is still mainly from households. Credit growth is likely to remain constrained as corporates appear to be tentative on capital spend and households remain highly leveraged, in spite of rates being at 30-year lows.

The portfolio continues to outperform its benchmark and is exposed largely to banks (84% in September), while the remaining 16% of the portfolio is invested in Government securities or short-term corporate debt.

The MPC is expected to keep rates on hold, with focus on the domestic and global growth outlook. Inflation risks appear to be exogenous in the short term and while a rate cut is still on the cards, expectations are that rates will remain lower for longer. The portfolio is well-positioned for the current rate cycle.

Within the 'soft patch' - the pace of the global recovery has slowed amid increasing uncertainty in global markets and mixed results on the international front over the quarter. Risks to the continued recovery are from pending debt policy in the Eurozone and the West, as well as tighter monetary policies and austerity measures being implemented globally.
Local business confidence rebounded in June, backed by increased consumer spending although sustainability remains to be seen. With domestic growth numbers over the quarter showing a sturdy recovery, the Monetary Policy Committee is expected to leave the repo rate unchanged until the recovery proves to be more certain with its consequent inflationary pressures.

CPI inflation y-o-y came in at 4.60%, a 0.9% increase over the quarter driven largely by price increases in fuel and food. On the contrary, PPI was lower than expected, increasing to 6.9% y-o-y from 6.6% in the previous month. Although high energy and food prices were the main drivers of the increase, other commodity prices remain subdued and should contain the PPI figures as well as consumer inflation in the months ahead. Potential second round effects of inflation, however, threaten this inflation outlook.

Growth in the money supply was marginally higher at 6.1% y-o-y in May, against a consensus expectation for a continued decrease in money supply figures that has occurred since January. Private Sector Credit Extension (PSCE) decreased, coming in at 5.2% y-o-y unexpectedly, on the back of corporate credit contraction after improved figures last month. Corporate credit appears to have given way to constraints from increasing uncertainties in global growth, overcapacity in some sectors and inflationary pressures going forward. Households continue to be the main drivers for credit demand, although high debt levels and possible interest rate hikes pose risks to credit demand growth.

The portfolio continues to outperform its benchmark and is exposed largely to banks (98% in June), while the remaining 2% of the portfolio is in Government securities or short-term corporate debt.

Looking ahead, a rate hike by the end of the year seems likely given the domestic economic data over the quarter and increasing inflation figures, although there are threats to growth from debt crises in the developed markets. To this extent, the portfolio is well invested for a change in the rate cycle.

The view from the bottom -we have seemingly reached the bottom of the interest rate cycle with the MPC holding the repo steady at the last meeting. Further rate cuts are unlikely, with most emerging markets tightening monetary policies in an attempt to rein in inflation, while a pre-emptive rate hike may hinder economic growth. Domestic inflation risk is on the upside with concerns surrounding wage increases, food and energy prices and rand volatility. The recovery appears well underway, but risks remain in the austerity policies and balance sheets of developed nations.

CPI inflation y-o-y remained steady, the February figure came in at 3.7%, in line with estimates. Inflation forecasts for the coming year are treading upwards, but still contained within the inflation band -mainly due to expectations of a firm rand and muted increases in consumer demand. PPI surprised on the upside, increasing to 6.7% y-o-y due to higher global agricultural and commodity prices, and is likely to continue this trend for the year.

Growth in the money supply came in at 7.55% y-o-y in February, against a consensus view of 8.5%, a slowdown from the January figure. PSCE increased in February to 5.43% and growth is expected to continue due to low interest rates and improved purchasing power of household incomes. Corporate credit demand increased 1.3% m-o-m, reflecting an improved outlook on future economic growth and the need for capacity building. However, credit growth continues to be supported largely by household demand and this should continue through the year.

The portfolio continues to outperform the benchmark STeFI Composite and is exposed largely to banks (96% in March), while 4% of the portfolio is in Government securities or short-term corporate debt.

The scope for a rate hike by the end of the year seems more likely given the current economic data and the tone of the Governor's address post the last MPC meeting. Inflation expectations are within the target range, but upside risk remains in the volatility of the rand and energy prices. To this extent, the portfolio is well invested for a change in the rate cycle.

South Africa is a BRIC (Brazil, Russia, India and China). After intense lobbying for trade relations, South Africa was invited to the forthcoming BRIC Forum ahead of other emerging countries with larger economies, populations and local companies, adding to South Africa's political clout and involvement in global governance. A further 50 basis points (bps) rate cut by the South African Reserve Bank (SARB) in November brought the repo rate to 5.5% with the main contributing factor being a decline in inflation expectations in the medium term. Investor sentiment for the New Year is positive, though fragile, and the SARB is expected to keep the repo rate on hold during 2011. This is in contrast to rate hikes in other emerging economies attempting to reign in inflation.

CPI inflation increased marginally over the quarter by 0.1% after taking a dip in October, coming in above the market expectation for the second consecutive month. The inflation trajectory is expected to be on the upside for the next few months as base effects set in, but figures should be muted due to increasing rand strength. PPI came in above market expectations, but lower than the previous quarter, decreasing the likelihood of a further rate cut.

Growth in the money supply was strong over the quarter with the November figure surprising on the upside, rising to 7.2% y-o-y, above the 6.9% forecast. PSCE continued its increasing trend to end the quarter at 5.6%. These figures reflect increasing liquidity in the economy. Credit growth is expected to recover, albeit slowly, in 2011 supported by household demand. Corporate credit demand should remain subdued given fragile business confidence and weak fixed investment activity.

The portfolio continues to outperform the benchmark STeFI Composite.

The portfolio is exposed largely to banks (92% in December), while 8% is in Government securities or short-term corporate debt.

The tentative recovery continues with expected slow upward trends in inflation and credit demand. The MPC is expected to keep rates on hold in Q1 2011 given the rand strengthening to three-year highs and increasing employment concerns. To this extent, the portfolio is well invested for a flat rate cycle.