The major driver of the interest rate markets remains the strong Rand. The currency continued to firm despite interest rates falling rapidly and the trade account worsening over the past few months. GDP grew 1.1% in the 3rd quarter as mining and manufacturing production are adversely affected by the Rand’s appreciation. Household consumption expenditure continued to grow and may accelerate further as the impact of lower rates work thru the economy.

Inflation as measured by CPIX declined further in October to 4.4%. The PPI declined by 1.8% year-on-year as imported prices fell 9% year-on-year. A lower turning point in inflation may be reached in the 1st quarter of 2004. The trade account registered an unexpected deficit of R713-million in October as imports outpaced exports by a wide margin. Imports of machinery and transport equipment increased markedly.

The Reserve Bank cut the repo rate by 1.5% at the MPC meeting in October taking short-term interest rates to new historically low levels. The market is pricing in a further cut in the next six months.

Inflation as measured by CPIX declined further in September to 5.4% as food inflation slowed further to 4.2%. The PPI declined by 1% year-on-year as imported prices fell 8% year-on-year due to the strong rand. A lower turning point in inflation may be reached in the first quarter of 2004.

The trade surplus declined to R612-million in September from R1400-million in August. The trade surplus is going to narrow significantly in 2003 versus 2002.

As expected the repo rate fell to 8.5% at the MPC meeting in October. Interest rates have drifted lower since the last cut in September with both three month and 12-month NCDs already discounting the expected cut. Currently, three month NCDs yield 8.8% and 12 month NCDs yield 8.3%.

Economic growth slowed further in the second quarter of 2003 to an annualised 1.1%, despite strong domestic expenditure growth of 5.5% annualised. A rebuilding of inventories and higher private sector fixed investment contributed to higher domestic expenditure.

The current account deficit increased to 1.4% of GDP in the second quarter, but capital inflows of twice this amount caused the rand to strengthen significantly.

Inflation, as measured by CPIX, declined further in August to 6.3%, with slowing food inflation the major driver. A lower turning point may be reached in the first quarter of 2004.

The market was taken by surprise when the South African Reserve Bank (SARB) called a special MPC meeting for 10 September. The latest economic releases did not point to a further easing in monetary policy. The trade account has been stronger than expectations due to higher US dollar prices for gold and platinum. For July inflation as measured by CPIX at 6.6% year-on-year was above expectations due to large increases in municipal rates, electricity and fuel. Private credit growth has been climbing by 13% year-on-year. In the second quarter of 2003, real gross domestic expenditure grew by an anualised 3.8% while real gross domestic product grew by an annualised 1.1%. The strong rand is impacting negatively on GDP growth.

The money market is expecting the SARB to reduce the repo rate after this week’s meeting and NCD rates have fallen by 25 basis points in anticipation.

The downward move in short-term interest rates is firmly entrenched. Over the past month the three month NCD rate fell by 75 basis points to 10.65% while the 12-month NCD rate decline by 40 basispoints to 9.50%. Thus the market is convinced that the repo rate will be cut by at least 1% at the August MPC meeting.

Inflation fell further in June with the annual rate of increase in CPIX at 6.4%. The sharp drop of 27c in the petrol price and falling food prices have been the driving forces. High wage settlements, rising commodity prices as well as rises in the petrol price in both July and August may slow down the downward trend in inflation

The Reserve Bank reduced the repo rate by 1.5% to 12.0% in mid-June. Interest rates decline further with the 3 month NCD rate falling to 11.4% and the 12 month NCD rate to 9.9%. The money market curve is pricing in a fall in call rates to 8.5%. Thus the market expects the repo rate to be cut by a further 3%.

Most macro-economic indicators are supportive of lower interest rates. Monetary policy in both the USA and Europe is loose with cash rates at historically lows. Both the PPI and the CPI is trending lower. With the Rand remaining firm imported inflation has contributed strongly to the lower inflation scenario. The only caution is relatively high wages growth and a deteriorating current account.

The money market sensed that the repo rate may decline at the next MPC meeting as inflation as measured by Statistics South Africa has been overstated by about 2%. Three month NCD rates declined by almost 80 basis points since beginning May, reflecting expectations for a 1% fall in the repo rate in mid June. It is possible that the repo rate may fall more than 1% which leave further scope for rates to fall further. The Rand reversed direction over May falling about 10% on a trade-weighted basis. The favourable impact of lower imported prices when the Rand was strengthening will slow from July.

The trade account, which has shown strong surpluses over the past year, declined sharply in April as exports declined markedly. We have to see if the same pattern continues going forward. Both money supply and private scetor credit extension grew strongly in April. A continuation of sharp increase in money supply will put a break on interest rate expectations.

The inverse NCD yield curve anticipates that the repo and call rates will decline substantially over the next year.

The rand, in line with other emerging market’s currencies, has strengthened further against a weaker US dollar. Over the next year the rand’s strength will contribute to a lower inflationary environment. The money market is starting to anticipate that the Monetary Policy Committee of the Reserve Bank may lower the repo rate at its next meeting in June. NCD rates have moved lower over the past week.

The NCD yield curve remains inverted with 12 month rates discounting a 3% fall in the repo rate over the next year.

The Monetary Policy Committee of the Reserve Bank decided to leave the repo rate unchanged at the meeting on 20 March. Their cautious approach can be explained by the sharp rise in labour costs over the past year and the Reserve Bank's determination to reach the set inflation target band. The real economy has grown at a satisfactory rate despite higher interest rates.

Call rates and NCD rates were stable during March. The NCD yield curve is inverted with 12 month rates discounting a 2% fall in the repo rate over the next year. The first reduction is expected in June.

Cal l rates and 3 month NCD rates remained stable over the seasonally tight December month. Longer term 12 month NCD rates have declined by 0.25% to 12.65% which already discounts a 2% fall in call rate over 2003.

Sentiment in the money market turned very positive as the Rand strengthened significantly against all major currencies. The inflation outlook has improved as imported products will become cheaper in the near future. The MPC committee kept the repo rate unchanged as the inflation rate has reached a peak, private sector credit growth i s tapering off and the balance of payments and economic growth i s satisfactory. The market is expecting money market rates to fall from the middle of 2003.

We take pleasure in highlighting the fund' s performance for 2002, with it finishing the year ranked first out of the 20 unit trusts in the money market category for the year ending 31 December 2002 (Source - Hugo Lampbrecht' s survey).