August inflation and money supply figures mostly came in below expectations in the September releases. PPI came in at 0.2% y-o-y, down from 1.5% in July and below market expectations of 1.0%. The decline in agricultural prices was the biggest contributor to the decline in the August PPI numbers. M3 money supply numbers also declined, down to 5.1% y-o-y from 7.3% in July, and well below the market expectation of 7.6%, as did private sector credit extension (PSCE), which decreased from 18.1% year on year in July to 16.8% in August, again below market expectations of 17.2%. CPI numbers were only slightly down from July, 5.1% for August y-o-y versus 5.2% for July.

The South African Reserve Bank cut rates in a surprise move at the beginning of September by 1%. This reduction was seen, not so much as a move to a more aggressive lowering of interest rates, but as a result of a concern regarding growth. Money market rates currently show an anticipated 100bps decline at the October MPC meeting, while the forward-rate-agreement (FRA) curve has already discounted this. The 12-month NCD rates have dropped from 9.60% to 8.45% and the 3-month rates from 10.20% to 8.95% during the month.

The Fund returned 1.0% for the month. At the June MPC meeting the repo rate was reduced by 1.5% to 12%. The CPIX revision, the stronger rand, improved inflation expectations and inflation revisions motivated a 150bps rate cut instead of the expected 100bps. Expectations are for a total drop of 400bps. SARB is significantly behind the curve and responded to this by increasing the frequency of their meetings. This might lead to a more rapid decline in interest rates.

The CPIX numbers for May were worse-than-expected at 7.7% y-o-y but still below April's 8.5% y-o-y. Headline CPI was 7.8% y-o-y, in line with expectations and down from April's 8.8%. The main contributor was the fall in the petrol price.

The largest ever fall in producer prices meant that the PPI numbers declined from 3.3% year-on-year in April to 1.1% year-on-year in May. As a result , money market rates declined substantially with the Safex call- rate falling from 13.3% to 11.7%. The NCD one year rate fell from 11.9% to 9.9% and the three month figure from 12.85% to 11.40%. FRA rates have remained bullish throughout the month. Month-end pressures have resulted in an upward movement in call rates, but the rest of the money market curve is still declining.

In March the CPIX and PPI numbers came in better than both expectations and the previous month's figures, with CPIX at 11.3% (year on year) versus expectations of 11.5%. February's CPIX was 13.7%. PPI came in at 6.2% (year on year) as opposed to expectations of 6.6% and 8.1% for the previous month.

Private sector credit extension came in higher than expected at 13.8% however the figures were distorted by accounting and regulatory changes. Despite the better than expected inflation figures, the SARB left rates unchanged as concern remains about meeting inflation targets. Uncertainty in global markets continued over the last month and the short end of the yield curve saw little movement in NCD rates. There was also little change in the FRA curve over the past month except for some slight movement around the time of the MPC meeting. At this stage the short end still indicates a rate cut in June.

This month saw relatively little movement in the money market rates, even after the release of positive economic data. CPIX came in at 12,2% year on year as apposed to 12.7% previously, and CPI was 14.4% year on year as apposed to 14.5% previously. Furthermore, M3 money growth and private credit extension both appear to be under control.

Rates are expected to continue to move sideways until the next set of inflation figures are released. The FRA rates still indicate that rate cuts are expected in 2003.