The uncertainty in Europe did not affect the money market with the 12 month NCD rate drifting marginally lower to 5.75%, while the 3 month NCD rate remained at 5.50%.

CPI rose by 0.2% month-on-month in August leaving the annual rate at 5.3% year-on-year. The fall in the rand in September will contribute to further rises in CPI over the next six months as the price of new vehicles, fuel and food prices adjust to higher input costs. Of the 12 subsectors, the education, food and housing sectors inflation rates are above the target range of 3% to 6%, while five sectors are within the range and three sectors are below 3%.

Private credit extension grew by 6.1% year-on-year in August as an increased demand for credit by the corporate sector was offset by a slowdown in the demand for residential mortgages.

We do not expect the repo rate to change over the fourth quarter as rising inflation limits the Reserve Bank to respond to a weaker economy.

CPI accelerated to 4.6% year-on-year in May due to higher food and fuel prices. The annual increase in the two largest of the 12 sectors, namely housing and the food and non-alcoholic beverage sector , rose by 6.6% and 6.1% respectively.

The current round of wage settlements may be critical for the inflation outlook. Unions are demanding wage increases of at least three times the inflation rate and employers would probably settle at midpoint between inflation and the union demands. With input costs that have risen faster than final prices over the last two years, it is reasonable to expect that the sharp increase in administrative prices and wage increases this year will be passed on in final prices.

CPI remained at 3.7% year-on-year in February. The rate will rise rapidly during the second quarter due to sharper higher food, fuel and electricity prices as well as base effects.

Real GDP grew by 4.4% in quarter 4 of 2010 with household consumption expenditure growing by more than 5%. A strong increase in inventories by businesses and a strong surplus in the trade account also contributed to the higher growth rate.

The spread of corporate paper versus the Jibar rates has narrowed sharply over the past six months. Various issues have become unattractive to invest in as the additional margin earned does not justify the liquidity risk in the paper.

The year 2010 was characterized by a sharp reduction in inflation which reached a low of 3.2% in September. The Reserve Bank lowered the repo rate by 1.5% to 5.5%.

The inflation picture may be less favourable during 2011. Since July 2010 both agricultural and mine commodity prices have rallied strongly. Hence food and transport costs may rise by more than expected. Short term interest rates may have reached the lower level for the current cycle.

In November CPI rose to a year-on-year rate of 3.6%. Higher food prices contributed 0.2% of the monthly increase of 0.5%.