Recent Fed and BOJ Meetings Imply Low Interest Rate will Continue Next Year (Business Brief No.3638)

Global financial markets were anxious about the results of two meetings recently held this month—one by the US Fed and the other by the Bank of Japan (BOJ). Some analysts and investors were hopeful that the Fed would signal an increase in the Fed Funds rate at some time during the remaining Federal Open Market Committee (FOMC) meetings this year or perhaps next year. They also anticipated that there would be a clearer BOJ policy direction after the revision of its quantitative easing policies. After those meetings ended, markets could only conclude that low interest rates would linger for some time across the globe.

Even if or when the Fed must raise its key rate to balance the US economy, the Fed will need to be cautious and regularly assess economic trends. At the same time, the BOJ will be continuing with its quantitative easing, using a new Quantitative and Qualitative Monetary Easing (QQE) plan that includes ‘Yield Curve Control'. Given these events, markets may bide their time to evaluate the effects of the new Japanese policy on their economy and inflation over the next six months.

As for the implications to Thailand, since it may take over three years for the Fed to gradually raise their key interest rate to reach long-term economic growth targets (other central banks will likely continue with their quantitative easing policies), KResearch views that the Bank of Thailand may maintain its key policy rate at 1.50 percent throughout this year, and even well into next year to support Thailand's economic recovery.

Meanwhile, issues warranting a close watch remain foreign investors' capital flows that may fluctuate if the Fed decides to increase the Fed Funds rate at one of the FOMC's later meetings this year. Its new dot plot forecasts will also affect the Fed's decision of when to raise the key rate, as well as the global financial market outlook next year.