The Reserve Bank Governor remained hawkish on inflation, and opted to increase the Repo rate again by 50 basis points to 10% at the August MPC meeting. This was widely anticipated by the market. The SARB's CPIX forecast worsened slightly, and it now expects CPIX to remain above the target (3%-6%) until the first quarter in 2008 and then expected to re-enter the target range in the second quarter of 2008. The risks to the inflation outlook are still firmly to the upside, in particular food inflation and oil prices.

This quarter has seen a sharp increase in global financial market volatility, triggered by the collapse in the US Subprime mortgage market. Central Banks were quick to react, and we saw the Fed cut both the Federal funds rate and the Discount rate by 50 basis points, bringing some calm to the global markets. This led to US dollar weakness, which in turn led to the strengthening of the Rand against the US dollar.

The money market yield curve continued to steepen as the Forward rate curve began to discount a further rate hike in October. The three-month NCD rate moved from 9.75% to 10.25% while the one-year NCD rate rose to a high of11%but ended the quarter at 10.85%.
The duration of the fund was lengthened slightly in order to benefit from the higher yields at the long end of the curve. Since further upside risk to interest rates remains, the buying of longer dated assets will be very selective.

A rapid deterioration in the inflation outlook was the trigger that caused the 50 basis points hike in the repo rate at the June Monetary Policy Meeting, after a pause at the February and April meetings. The April CPIX inflation number released in May came out at 6.3%, which was not only above market expectations of 5.9% but also breached the inflation target of 6% to 3% for the first time since August 2002. While food and petrol price increases were the main contributors to the increase in inflation in the past, the concern now is that it is broad based. All subsequent inflation related data released was worse then expected. The rate increase took the repo rate to 9.5% and the prime lending rate to 13.0%.

This resulted in rates rising across the yield curve, as the market began to discount a further 50 basis point hike at the August meeting. The three month NCD rate increased from 9.1% to 9.7% and the twelve month NCD rate from 9.7% to 10.6%.The yield curve continued to steepen with the differential between the short end (call rate) and the long end (one year NCDrate) of the yield curve increasing to 160 basis points.

The portfolio was managed conservatively, with duration kept relatively short, since the risk of a further hike in August remains a strong possibility.

The Monetary Policy Committee (MPC) decided to leave the repo rate unchanged at 9.00% at its first meeting for the year in February 2007. Thiswas in linewith consensus expectations, but contrary to our view of a 50bp increase. The key reason behind theMPC's decision was an improved inflation outlook. The Reserve Bank's forecasting model suggests that CPIX inflation is not expected to breach the upper limit of the 3%to 6%target range and only expected to peak at 5.6% in the second quarter of the year.

Money market rates fell between 5 to 15bp across the curve after the rate decision. The one year rate traded as low as 9.425%. However, the rates gradually began to increase towards the end of the quarter, as local fundamentals began to change and inflationary pressures increased. The duration on the portfolio was marginally increased to benefit from the higher rates in the long end of the curve. We still believe that rates have not reached the end of the tightening cycle and room still exists for a further 50bp hike. Going forward, the portfolio will continue to be dynamically managed according to market conditions.

The decision by the Monetary Policy Committee (MPC) to hike the Repo rate by another 50 basis points at both the October meeting as well as at the December meeting came as no surprise to the market, given themounting risks to an already deteriorating inflation picture. These risks include robust growth in retail sales, consumer's unabated appetite for credit, a sharp rise in the money supply, rising food prices and a volatile rand. The Repo rate was increased to 9% and prime to 12.50%. The yield curve steepened in the beginning of the quarter as both rate increases were expected and fully discounted by the market, and then a slight flattening of the curve towards to end of the quarter as the long end of the curve (9-12 month NCD rate) began to stabilise while the short rates (1- 6 monthNCDrate) continued to rise. Duration of the Fund is still being kept relatively short in anticipation of a further 50 basis point hike at the next MPC meeting to be held on the 14 and 15 February 2007.