The first quarter of 2015 saw markets beginning to grasp the concept that the Reserve Bank could potentially have room to cut the repo rate. This was considered an unlikely event, but given the sharp fall in the Brent crude oil price and continuously declining global food prices, inflation numbers over the coming months were expected to remain on a downward path.

In the buildup to the January MPC meeting, and in light of the above, the markets began to price in a potential rate cut. The NCD curve flattened over the 6 to 12 month area and FRA markets fully priced in the probability of the SARB cutting the repo rate by 25 basis points. The higher and more attractive rates seen on the NCD curve in December 2014 were quickly reversed. The SARB ultimately kept rates on hold at the January 2015 MPC meeting as the path of inflation allowed the SARB to be more accommodative of low SA growth. The SARB remained hawkish in tone, cautioning the market that the current trajectory in inflation was potentially transitory and highly sensitive to oil price fluctuations. The SARB highlighted greater upside risk to the repo rate.

The SARB expectation of Headline Consumer Price inflation was at a low point of 3.8% in the first quarter of 2015. In February, oil prices reverted to levels around $60, and fuelled expectations of petrol price increases. National Treasury delivered its budget speech citing an increase to fuel levies in order to raise the additional revenue required to maintain a stable budget deficit. The petrol price hike in the beginning of April would therefore reverse most of the benefits accrued to consumers of lower oil prices, and result in inflation returning to an upward path. The budget also indicated that ESKOM would be allowed to apply to NERSA for a 25% hike in tariffs. February saw stronger than expected US nonfarm payroll data, which caused the US Dollar to strengthen against most currencies, and the Rand experienced significant weakness as a result. Currency risk on the timing of US Federal Funds rate hikes persists. There is a growing impetus that the Fed is reaching its targets to begin normalising US interest rates. This has seen sustained pressure on global currencies as the dollar remains strong.The March 2015 MPC meeting saw rates unchanged, but the uncertainty and risks regarding these factors point largely to upside risk on the inflation outlook.

While inflation is still expected to remain within the target band for 2015, it is widely expected by the market to significantly breach the 6% upper bound in Q1 2016 as base effects filter through. The market remains cautious as rates have steadily risen to reflect increased expectations of hikes in the latter end of 2015. As such, the money market curve now offers value in longer term NCD's as well as opportunities to trade the steepness of the curve.