November was a very bullish month for South African interest rates. We have seen rates move down by 30 to 50 basis points across the yield curve. On the short side, rates moved down significantly in the 6 to 12 month area, resulting in an inverse money market curve. An inverse curve indicated a strong expectation of further rate cuts in the near future.

The strong move in rates was largely fueled by the weak US dollar, a strengthening rand and continued low SA inflation rates. The month of November saw the rand appreciate by 5.9% to the US dollar (from ZAR 6.14 to ZAR 5.80) and 1.6% to the euro (ZAR 7.80 to ZAR 7.68).

The oil price continued to fall from its highs. Prices per barrel moved down by 9.2% during the month (from USD 48.7 to USD 44.2). This signaled lower energy prices and helped to alleviate some inflationary concerns. Inflation figures remained positive for interest rates. October CPIX came in at 4.2% year-on-year (marginally above the 4.1% consensus).

These factors encouraged most market participants to expect a 50 basis point rate cut announcement at the next Monetary Policy Committee meeting on 8 and 9 December. However, strong credit growth figures for October and robust 3rd quarter GDP growth (5.6% quarter-on-quarter) have subsequently dampened some of these expectations.

As at the end of November the market seemed to be at odds whether the next rate cut would be in December or in February next year. The notion that further rate cuts are on the way did seem to be accepted by all.

Money market rates have moved sideways over the past month as there was no significant trigger for a shift in levels. The Monetary Policy Committee meeting left the repo rate unchanged at 7.5%. The medium-term budget policy emphasis has shifted towards a more expansionary policy which will reduce the need for a stimulatory monetary policy going forward.

The weakness of the US dollar over the past month caused the rand to strengthen from 6.50 to 6.10. This move supported a strengthening in the bond market.

Inflationary figures remain positive for interest rates. CPIX measured 3.7% in September with low food and retail prices contributing significantly to the low figure. The annual PPI in September of 1.4% benefited from the seasonal drop in electricity prices. The trade account improved in September but is still negative.

The next meeting of the Monetary Policy Committee will determine the short term direction of interest rates. The current scenario is dominated by favourable inflation numbers and a very buoyant domestic economy. The exchange rate has softened to the current level of R6.50 per US dollar after the previous reduction in the repo rate.

The strong economy has led to imports growing much faster than exports. Hence both the trade balance as well as the current account has weakened substantially.

A major change since August is a runaway oil price due to extraordinary weather events and the situation in the Middle East. The higher oil price will lead to higher prices for fuel, diesel and paraffin in South Africa over the remainder of the year.

The anticipation of a further fall in the repo rate has caused a further decline in NCD rates. 3 month NCD yields 7.30% and 12 month NCD yields 7.55%.

Reserve Bank surprised the money market by reducing the repo rate to 7.5% after the Monetary Policy Committee (MPC) meeting in August.

Interest rates fell sharply with the 3 month NCD rate reaching 7.3% and the 12 month NCD rate 7.7%. The rand weaken significantly after the reduction in interest rates. With upward pressure on oil prices, the next two months will show higher inflation increases due to higher fuel prices.

The inflationary outlook was very favourable in July with both PPI and CPI increasing below expectations. Rand strength limited the annual rate of growth in PPI to 0.7% as prices over various industries declined. The annual rate of growth of CPI declined to 4.2% as food and transport costs declined.

The rand’s weakness in August caused the Reserve Bank’s foreign reserves to increase by 9% over the month to R79.2bn. The trade account recorded a smaller deficit of R470million in July than previous months.

The money market moved sideways during June. The three month NCD rates remained at around 8.0%, while the 12 month NCD rate drifted lower from 9.1% to the current level of 8.9%.

The Monetary Policy Committee (MPC) meeting left the repo rate unchanged at 8%. The tone of the MPC meeting is more cautious on inflation. After a sharp rise in the oil price to above $40, the price has corrected back to the $35 level. The sharp rise of 30c per litre in June is partly reversed by a fall of 17c per litre in July.

The strong growth in domestic expenditure will become the driving force of the direction of monetary policy. In June motore vehicle sales increased very strongly despite high vehicle prices. Consumer borrowing continued to grow strongly during May.

The money market moved sideways during June. The three month NCD rates remained at around 8.0%, while the 12 month NCD rate drifted lower from 9.1% to the current level of 8.9%.

The Monetary Policy Committee (MPC) meeting left the repo rate unchanged at 8%. The tone of the MPC meeting is more cautious on inflation. After a sharp rise in the oil price to above $40, the price has corrected back to the $35 level. The sharp rise of 30c per litre in June is partly reversed by a fall of 17c per litre in July.

The strong growth in domestic expenditure will become the driving force of the direction of monetary policy. In June motor vehicle sales increased very strongly despite high vehicle prices. Consumer borrowing continued to grow strongly during May.

April has been quiet in the money market. The three month NCD rates remain at 8% and will only move higher once the market anticipates that the Reserve Bank will change the repo rate. Call rates are significantly lower than three month rates, making the latter the more attractive investment horizon.

Inflation as measured by CPIX improved to 4.4% in March, while April may see a higher monthly rise due to tax increases announced in the February budget.

The domestic economy is performing strongly. Retail sales grew by 10.6% in real terms over the last year. Demand for mortgages, leasing finance and instalment credit has increased strongly in a low interest rate environment.

The Reserve Bank left the repo rate unchanged at 8% at the February MPC meeting. Economic indicators show that domestic consumption remains strong. Strong consumer credit for mortgage finance has supported strong retail sales over the past year. In February car sales increased by 28% year-on-year.

In February the CPIX increased by 4.8% year-on-year. The biggest contributor to the monthly increase of 0.5% was fuel prices. We have passed the lower turning point for CPIX for the current cycle.

Money market rates have drifted higher with three month NCD rates at 8%. Rates should stabilize at these levels until the SARB indicates to the market that monetary tightening will happen.

During February money market rates moved sideways. The Reserve Bank left the repo rate unchanged at 8% at the latest Monetary Policy Committee meeting, as the economy does not require further monetary stimulus.

In January the CPIX increased by 4.2% year-on-year which was above market expectations. Medical costs and food prices caused the bigger rise. In contrast, the January PPI fell by 1.4% year-on-year with the imported component making the biggest contribution.

Money market rates are expected to trade around current levels for the first half of 2004.

The positive mood in the money market has faded since December. A weakening and volatile rand has impacted on a very bullish market which was pricing in further interest rate cuts.

The sharp rise in prices of basic agricultural products, such as maize and sunflower, will impact on inflation later in 2004. This coincides with a natural lower turning point in inflation. Since December, 3 month NCD rates have risen by almost 1%, while 12 month NCD rates have risen by almost 1.5%. The market, therefore, expects no further rate cuts at the February Monetary Policy Committee meeting.

The trade account improved strongly in December as imports fell sharply. The trade surplus for 2003 amounted to R16bn, versus R39bn in 2002. The domestic economy is growing strongly with high real growth in retail sales as well as in motor vehicle sales. The sharp fall in borrowing costs since June 2003 has improved consumer confidence significantly.

Money market rates drifted higher during December as the Reserve Bank lowered the repo rate by only 0.5% at the MPC meeting. The market was expecting at least 1%. The 3 month NCD rate rose from 7.1% to 7.65% while the 12 month NCD rate rose from 6.8% to 7.9%.

The market will take note of the Reserve Bank’s cautious approach. A further deterioration in the trade balance in November, to a deficit of R4.3 billion, reflects the weaker export competitiveness of the SA economy.

The inflation numbers remain impressive. In November the PPI declined by 2.5% year-on-year as imported prices have fallen by nearly 10%. CPIX increased by 4.1% year-on-year in November. Note that food inflation is bottoming out as market prices for maize and sunflower has risen sharply due to below average rainfall in the major planting regions.