During the quarter under review, market sentiment became a lot more bullish after the re-weighting of the CPI basket, early next year, was announced. The Repo rate was kept unchanged at the August MPC meeting and the money market curve flattened out with the longer end of the curve moving down rapidly. The one year rate closed at 12.5% versus 13.75% the previous quarter.

With current global turmoil that markets are experiencing, and interest rates being cut around the globe, the expectation is that local interest rates may be cut earlier than originally anticipated.

The STANLIB Extra Income Fund continued to perform well and remained stable at R415 million.

The weaker Rand remains a threat to the inflation outlook. We have structured our portfolios defensively, short of duration, as the long end of the yield curve does not offer value at the current levels.

During the quarter under review, market sentiment became a lot more bearish after the Governor indicated that inflation is expected to peak at much higher levels than originally anticipated. He commented that interest rates could be raised as much as 200bp. This caused panic in the Money markets and rates increased by 100bp across the yield curve, with 1 year rates trading as high as 14%. At the June meeting the Repo rate was only raised by 50bp, which then caused the rates to drop by 50bp across the curve. This created a lot of volatility, which provided the fund with lots of investment opportunities.

The Standard Bank Extra Income Fund continued to perform well and remained stable at R435m.

Due to inflation expectations to remain outside the target range for some time, as a result of higher food, oil and electricity prices, the duration of the Fund will be kept short of the index over the next few months.

The STANLIB Extra Income Fund has been reclassified from the Domestic- Fixed Interest- Varied Specialist category to the Domestic- Fixed Interest- Income category with effect from 1 June 2008. The decision is still pending on whether the fund will keep its price and performance history or not.

The South African Reserve Bank's (SARB) decision to raise the Repo rate by 50 basis points at both the October and December Monetary Policy Committee meetings came as no surprise to the market. The money market had fully discounted the move as inflation numbers received continued to overshoot the SARB's forecast and elevated the probability of a hike. The 50 basis point hike in December was the eighth consecutive hike in 18 months, which took the Repo rate to 11.0% and the prime lending rate to 14.5%. Upside risks to inflation from the oil, food and electricity sectors were given as key reasons for further monetary tightening.
Upward pressure remained on the short end of the yield curve and money market rates increased over the quarter. The 12 month NCD rate started the quarter at 10.85% and ended the quarter significantly higher at 11.90%. The Fund was actively managed according to market conditions and the duration kept relatively short in light of the possibility of a further rate hike in January.