Money market rates continued to move higher as we are approaching the October Monetary Policy Committee meeting. The current 3 month NCD rate of 8.50% is reflecting a 50 basis point rise in the repo rate, while the 12 month NCD rate of 9.55% has priced in a rise of 1.5% in the repo rate over the next year.

Although most economic information is negative for interest rates, the sharp decline in commodity prices, especially energy, will create some relief for inflation.
The current account deficit in Q2 remained large at 6.1% of GDP. As the trade figures shows no significant improvement in July and August, the current account deficit will not improve drastically in Q3.

Inflation continued the upward trend in August with CPIX rising to 5.0% year-on-year and PPI rising to 9.2% year-on-year. Fuel and food prices were the major contributors for both CPIX and PPI.

In August 2006 private sector credit grew by 25.0% year-onyear and by 1.2% from July 2006 as mortgage advances growth remained above 30% year-on-year.

The repo rate was increased to 8.5% on the 13th of October as the MPC remains concerned with the inflation risk to the upside. Further monetary tightening will continue until credit growth and consumer expenditure slows significantly.

The change in the outlook for interest rates for the next 12 months has been triggered by an increase in the risk for investors in emerging markets that coincided with a correction in commodity prices after an exponential rise since the beginning of the year. The rand's decline of over 20% on a trade-weighted basis has increased the expected inflation rate over the next 12 months. The current money market yield curve is now discounting a further 1% rise in the repo rate over the next year.

The Balance of Payments deteriorated in Q1 of 2006 to a deficit of 6.4% of GDP from 4.5% in Q4 of 2005. The deterioration from the previous quarter was caused by a R17bn decline in exports, an increase of R9bn in imports and a R5bn increase in service payments. The trade figures until May do not reflect a turnaround in the deficit, but with the rand about 20% weaker one does expect an improved situation over the remainder of 2006.

GDP grew by 4.2% in Q1 of 2006. The abnormally large increase of 14.7% in GDE can be explained by a strong growth in inventories especially oil and the difference in estimating growth from a consumption versus production side. Private sector credit growth has started to slow off a high base. The annual growth rate slowed to 22.7% in May from 23.2% in April. Mortgage advances and instalment sales, however, continued to increase strongly over the month.

PPI rose to 5.9% year-on-year in May from 5.5% year-on-year the previous month. Food prices at the agricultural level, metal ore prices and alcoholic beverages increased sharply. CPIX rose to 4.1% year-on-year in May from 3.7% in April due to the impact of higher local fuel prices. Fuel prices will have a similar effect on CPIX in June and July.

The Reserve Bank’s decision to increase the repo rate to 7.5% at the Monetary Policy Committee meeting on 8th June has confirmed that the cyclical bottom in short rates has been reached. A major factor influencing the decision is the Bank’s upward revision of the expected inflation rate from 4.9% to 6.2% for the first quarter of 2007 due to an upward revision in oil price assumptions.

Money market rates have adjusted accordingly with 3 month and 12 month NCD rates rising to 7.40% and 7.90% respectively.

In April CPIX declined marginally from 3.8% to 3.7% year-on-year. The monthly increase of 0.4% was driven by higher petrol prices and rising food prices. In April the PPI year-on-year rate rose to 5.5% from 5.4%. The monthly increase of 1.0% is mostly due to the impact of especially higher oil and coal prices.

For April the annual growth M3 slowed to 23% from 26.8% year-on-year and the annual growth of PSCE slowed to 23.2% from 24.3% year-on-year. Mortgage advances and leasing finance were the biggest contributors.

Money market rates remained unchanged as the Monetary Policy Committee left the repo rate at 7% at their meeting in mid-April. Over April the 12 month Jibar (Johannesburg Interbank Rate) rose by 5 basis points to 7.43%, while the 3 month Jibar fell marginally to 7.08%.

In March CPIX fell sharply from 4.5% to 3.8% year-on-year due to the base effect of the large monthly increase in March 2005 falling away. The monthly increase of 0.4% was muted as the increase in education fees and food prices were lower than expectations. The PPI year-on-year rate declined from 5.5% to 5.4%. The monthly increase accelerated to 0.4% as food prices rose strongly.

The trade balance recorded a deficit of R2.9 billion in March taking the cumulative deficit for the first quarter to R14.4bn. Thus the current account remains negative in the first quarter. Net Reserves strengthened to above $20 billion as the Reserve Bank purchased foreign currency in a strong market.

For March 2006, M3 accelerated sharply to 26.8% year-on-year especially as company deposits increased significantly. PSCE accelerated to 24.3% year-on-year from 21.5% previously. Overdrafts and mortgage advances grew strongly.

Our view remains that interest rates will not change significantly during 2006 as the repo rate is expected to remain unchanged at 7%.

Money market rates remained stable over February as both the South African Reserve Bank’s Monetary Policy Committee meeting as well as the Government’s budget contained no major surprises.

Real GDP growth slowed to 3.3% in the 4th quarter of 2005 from 4.2% in the 3rd quarter as the strong rand slowed growth in the agriculture, manufacturing and mining sectors. Construction, wholesale and retail trade showed the strongest growth. The trade deficit in January 2006 widened sharply to R7.7billion as imports surge after the seasonal slowdown in December 2005. The SARB gross gold and foreign exchange reserves increased by US288 million to US22.45 billion by end February 2006.

A sharp monthly increase of 0.7% in CPIX in January 2006 caused the annual rate to rise to 4.3%. Rising food prices were the major contributor. PPI accelerated to 5.5% year-on-year but a surprising fall in agricultural products prices constrained the rise. For January 2006 M3 accelerated to 19.7% year-on-year and PSCE accelerated to 20.4% year-on-year. Mortgage advances grew by R7 billion and other loans and advances grew by R9.7 billion.

The economy does not currently require a monetary stimulus and with inflation staying within the targeted range we foresee that interest rates will remain on hold for 2006.

The rand’s strength on the back of strong equity inflows supported the downward trend in interest rates during January. Both 3 month and 12 month NCD rates declined until mid January before drifting higher as the market’s anticipation of a rate cut in February started to diminish.

The Reserve Bank left the repo rate unchanged at the Monetary Policy Committee meeting in February. Although various factors have turned the inflation outlook more positive over the past three months, international factors such as oil and food prices remains a significant risk for inflation.

The SARB gross gold and foreign exchange reserves increased by US1.6bn to US22.2bn by end January 2006. The trade account swung around into a surplus of R3.5bn in December as imports declined sharply. For 2005 the cumulative trade deficit is R21.8bn.

CPIX for December grew 0.1% as the sharp fall in fuel prices compensated for a 1.4% rise in food prices. The year-on-year rate increased to 4.0% exceeding market expectations. PPI accelerated to 5.1% year-on-year with agricultural products making the biggest contribution.

M3 accelerated to 18.1% year-on-year and PSCE accelerated to 19.7% year-on-year during December. Mortgage advances, other loans and especially investments continued to grow strongly.

The investment objective of the fund is to provide a medium whereby investors can obtain undivided participation in a diversified portfolio of such money market instruments as defined from time to time. The primary performance objective of the fund is to obtain as high a level of current income as is consistent with capital preservation and liquidity.

The PSG Money Market Fund actively invests in South African cash deposits and highly liquid, fixed-interest securities such as Negotiable Certificates of Deposit, Bankers' Acceptances, Treasury Bills, Debentures, Gilts and Semi-Gilts. A spread of investments in top-quality financial instruments and institutions moderates risk through diversification. Only short-term instruments with a maturity of one year or less are permitted, however the fund will maintain a weighted average maturity of no more than 90 days. This reduces the fund's exposure to price fluctuations and interest rate volatility and ensures added capital stability. Returns consist of interest income. The fund aims to outperform traditional savings vehicles such as fixed deposits and call accounts over the long term and to provide capital security, a steady income yield and high liquidity.