We at KResearch expect that the US Federal Open Market Committee (FOMC) will increase its key policy rate by another 0.25 percent to 1.50-1.75 percent at the second meeting of 2018 slated for March 20-21, given that the US economy has grown beyond its potential. Looking ahead, there is a likelihood that unemployment will slip to a five-year low, which should allow the Fed to undertake further policy normalization gradually, aimed at easing risk stemming from an overheated economy. US inflation has remains relatively stable, meaning that the Fed may not necessarily have to undertake more rate hikes any time soon.
As for the impact of this on Thailand, the Fed Funds rate increase this time around may widen the yield spread between US Treasuries and Thai government bonds, thus likely precipitating capital outflows from Thailand, somewhat, while Thai government bond yields may increase at a more gradual pace than those of US Treasuries. Thai interest rates are not expected to change much, and any such increase would no doubt hinge on signals from the Monetary Policy Committee.
With regard to the direction of the Baht, although some capital has left Thailand in recent months, that has not been sufficient to significantly weaken the Baht’s value when compared to risks to the US Dollar stemming from current political issues in the US and its more aggressive trade policy that have together resulted in sell-offs of US Dollars, based largely on anxiety toward a possible trade war. The huge US fiscal deficit will also likely dampen the US Dollar in the near term.