For the quarter under review, the Reserve bank left its benchmark interest rate unchanged at 5.5 percent, in line with market expectations. On the contrary, however, there seems to be growing sentiment for the Monetary Policy Committee to pursue more accommodative measures, to stimulate domestic growth in the wake of further global economic pressures experienced in the Euro-zone as well as the United States of America. At the September MPC meeting governor Gill Markus stated that a rate cut had been discussed. However, following the Rand depreciation of 18 percent during the last quarter, it's worst performance since 2001, such discussions were abated due to the effect of such a depreciation on the inflation trajectory.

Sustained Rand weakness will prevent further rate cuts; however, if the oil price continues to decline and global food prices follow the same trend, the resultant inflation projection would allow the SARB sufficient room to cut rates, buoyed by the current state of the ailing domestic economy. South Africa is likely to see GDP growth of around 3 percent this year, but the high unemployment rate of above 25 percent remains a concern.
GDP growth in quarter three is likely to remain benign. The Kagiso PMI (an indicator of manufacturing activity) increased to 50.7 in September, albeit positive, the employment index remains below 50. CPI inflation was unchanged at 5.3 percent, but Producer price inflation gathered momentum to record a print of 9.6 percent.

The Forward-Rate Agreements (FRAs) continue to assign a high probability of a rate cut at the November MPC. Gill Markus has made mention of the fact that the Euro-zone crisis will take a considerable period of time to recover and for the economic region to gather thrust, further supporting the stance for further economic stimulation. However, the STANLIB view is that interest rates will remain flat for a prolonged period of time.

During the quarter under review, the Reserve Bank elected to keep the repo rate unchanged; this was in line with market expectations.

The Governor's speech after the May MPC meeting made reference to the fact that the Reserve Bank is expecting the upper limit of the inflation target to be breached in the final quarter of 2011 and to peak at 6.30% in the first quarter of 2012. Inflation is expected to return within range by the second quarter of 2012. This pressure on inflation is expected to come from administered price increases. According to the Reserve Bank the main risks to the inflation outlook continue to emanate from cost push pressures. The Governor highlighted that the bank will monitor closely the second round effects which can result in more generalised inflation. The market will watch closely the Governor's comments after the July MPC meeting on the 21st of July.

The forward rate agreements are pricing in the expectation of a rate hike in the last quarter of 2010.

With inflation fears the longer end of the Money Market curve has adjusted to price in a rate hike. The shorter end has remained flat. Floating rate notes and shorter dated instruments are currently more favourable.

For the quarter under review the repo rate was cut by a further 50 basis points at the November MPC meeting. This rate cut was in line with market expectations. In total rates have been cut by 650 basis points since December 2008. The Reserve Bank has however commented that the scope for further downward movements in rates is seen to be limited. Market expectations are that rates remain on hold for 2011.The upside risks to inflation are higher administered prices, wage increases and intemational food prices. The Reserve Bank is expecting these risks to be contained for the short term.

Money market rates are flat from the three month area out to the one year area. With the risk of negative inflation surprises in 2011, floating rate notes and prime link notes are offering the best value.