Fund review
During the quarter under review the repo rate was cut by 50bps in the August MPC meeting, bringing the total to 500bps since December 2008.Rates were kept on hold at the September MPC meeting giving an indication that the Reserve Bank may feel that enough has been done in terms of rate cuts. Gill Marcus takes over as Governor in November, her stance on inflation targeting is expected to be similar to that of the current Governor.

Looking ahead
The FRA market is pricing flat rates for one year, with the possibility of increasing rates thereafter. Inflation is expected to move back towards the target range during the first quarter of 2010.As mentioned in the last quarterly review, due to cost push inflation pressures filtering through, we expect inflation will move out of the target range towards late 2010. Due to concerns on inflation pressures going forwards and the fact that rates have reached the bottom of the cycle, we will keep the funds short of the benchmark.

During the quarter under review we saw another two rate cuts of 100bps each, bringing the total to 450bps since December. At the June MPC meeting the Governor elected to keep rates on hold, sighting current inflation levels as a main reason and that the economy may be nearing the lower turning point. It must be noted that this could be Tito Mobweni's last MPC meeting as there is no July meeting and his contract expires in August, this leaves a fair amount of uncertainty regarding monetary policy going forwards. Following the comments from the Governor at the June MPC meeting the FRA curve is now indicating rates will remain flat for the year, with the possibility of increasing rates thereafter.

Our expectations are that rates have reached the bottom of the cycle and that inflation will continue to be sticky due to higher electricity prices, higher wage demands, and higher fuel prices. As a result we will keep the duration of the funds short of the benchmark.

During the quarter under review the global economy continued to weaken significantly, with the South African economy having not escaped the impact of these developments. As a result The South African Reserve Bank cut rates in February by 100bps and another 100bpb at an interim meeting in March. The SARB also announced that MPC meetings will be held on a monthly basis, except for July, to enable them to monitor changes in the market more closely.

The FRA curve is discounting further rate cuts of up to 150bps for the year. Thus bringing total rate cuts of 500bps for the cycle.

The inflation outlook remains a concern for The Reserve Bank. Going forward we expect this to be taken into consideration when deciding on the depth and amount of rate cuts.
Due to our expectations that rate cuts may be mostly in the first half of this year and with the risks of inflation surprising to the upside and the money market yield curve being inverse, we anticipate value will be in the short end of the curve.

As expected the SA Reserve Bank opted to cut the Repo Rate by 50 basis points at the December MPC meeting. This is the first cut in interest rates since April 2005. The Money Market yield curve inverted and is discounting a further 250 basis points of cuts in interest rates during the year. The FRA curve is discounting even more aggressive interest rate cuts of up to 400bps during 2009. These forecasts are subject to a greater degree of uncertainty than usual, given the highly volatile global environment. Inflation is expected to continue its downward trend, while the exchange rate remains the most significant upside risk to the inflation outlook. STANLIB's view is that the latest interest rate movement sets the tone for successive interest rate cuts of 50 basis points in each MPC meeting during 2009, reinforcing the SARB's commitment to inflation targeting. Due to the yield curve discounting more aggressive cuts we have structured our portfolios shorter duration than the benchmark, with the view that floating rate instruments will offer better returns than fixed rate investments.