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15 Nov 2005

Thai Economy

Thai Interest Rate Outlook, 2006: Watching Inflation and Economic Growth

คะแนนเฉลี่ย

Based on historical data, Kasikorn Research Center (KResearch) has found that the beginning of the present upward cycle in interest rates in the Thai financial system differs from the past two rounds. In previous instances, liquidity crunches in the market along with hefty current account deficits and rising inflation were the factors behind those two rate increases. This time, however, the start of the upward interest rate cycle has been led by the Bank of Thailand's implementation of monetary policy aimed at stabilizing inflation as part of its inflation-targeting framework. What has been learned from past rate increases is that commercial banks had tended to overshoot the mark. This can be seen from the fact that downturns in rates usually occurred only two to three months after they had reached their peaks. It was also found these downturns in the interest rate trend bore a relation to the variance or gap in values between the nominal GDP and lending rates such that this variance became a negative value. Moreover, as rate hikes peaked, the magnitude of deposit rate increases usually exceeds that of lending rates. In other words, the spread between lending and deposit rates became narrower.

The reasons behind the present round of rate hikes are different from those in the past. Recently, rate hikes by commercial banks have been prompted by the actions of policymakers, not liquidity shortages as seen in the past. However, the pattern of rate increases has been much the same. That is to say, long-term, rather than short-term interest rates, have led the way, and the BOT's policy rate will likely peak in the middle of 2006. However, overshooting the mark in rate increases may not be so evident as in the past, given that commercial banks are currently not confronted with the severe liquidity crunch evidenced in the past two upward interest rate cycles.

According to KResearch's projection for interest rates during the remaining month of this year , the BOT's benchmark 14-day R/P rate may rise to 4.00-4.25 percent by the end of this year from the present 3.75 percent. Official rate hikes may result in increases in money market rates and bond yields leading to continued competition between financial institutions and capital markets in launching savings-related products. As a result, commercial banks may eventually decide to lift rates again. KResearch thus forecasts that 3-month and one-year fixed deposit rates, as well as the minimum lending rates (MLR) of large commercial banks may edge up to 2.25, 3.00 and 6.75 percent, respectively, by the end of this year, compared with their lowest levels of 1.75, 2.25 and 6.25 percent, seen presently.

Forecast of Interest Rates of Large Thai Commercial Banks In 2006
% Interest rates

(End Period)
Current interest rates

(Nov14,05)
Forecast figures *
2005
2006
GDP growth > 5%
GDP growth only 4%
14-day repurchase rate
3.75
4.00-4.25
5.00
4.50
Saving rates **
- Savings
0.75
0.75
1.25
0.75
- 3-month fixed rate
1.75
2.25
3.50
2.50
- 1-year fixed rate
2.25
3.00
4.25
3.50
MLR
6.25
6.75
8.00
7.00

Notes: * Forecast by KResearch

** Minimum saving interest rates at four large commercial banks, i.e., Bangkok Bank, Krung Thai Bank, KBANK and Siam Commercial Bank

For 2006, it is forecast that the 14-day repurchase rate will rise continually to a peak out at 5.0 percent by the middle of 2006 to block inflation that will remain high in the first half of that year. These BOT rate hikes--coupled with the assumption that next year the Thai economy may grow around 5.0 percent (BOT forecasts GDP growth of 4.5-6.0 percent next year), and if expansion in net performing loans within Thai commercial banking system is not less than the target forecast for 2005 at THB280 billion. KResearch believes that an upward pace of commercial banks' interest rate will continue into 2006 and views that the 3-month and 1-year fixed interest rates will move up to 3.5 percent and 4.25 percent, respectively, by the end of 2006, from 2.25 percent and 3.0 percent at the end of 2005. Moreover, general savings rates may be lifted during 2006 by 0.50 percent to 1.25 percent by the end of 2006, and the MLR may rise to 8.0 percent (which would still not exceed the nominal GDP, which should have a value of not less than 8 percent next year). However, if economic expansion is lower than forecast, or grows only 4.0 percent, the 3-month and 1-year fixed interest rates may rise over the end of 2005 by only 0.25-0.50 percent to stand at around 2.50 percent and 3.50 percent, respectively, as would the MLR, which might rise by 0.25 percent to 7.0 percent.

Important turning points in this upward interest rate cycle that must be closely monitored will be the inflation trend and growth of the Thai economy, particularly in the last half of 2006. A changing direction in either of these two factors would have considerable influence toward the interest rate policy of the BOT. Meanwhile, the trend of loan extension at commercial banks, as well as the magnitude of liquidity reduction would also be factors that define the continuation of the upward interest cycle in the Thai financial system in this round.

Thai Economy

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