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11 Jun 2018

International Economy

Fed is expected to raise the policy rate by 0.25% during the meeting on June 12-13 supported by continuing expansion of the US economy (Business Brief No.3746)

​         KResearch expects the Federal Reserve (Fed) to raise its policy rate by 0.25 percentage points from 1.50-1.75 percent to 1.75-2.00 percent during the fourth round of the Federal Reserve Open Market Committee (FOMC) meeting this year on June 12-13, 2018.  A solid expansion of the US economy and the fact that the US inflation rate is moving in-line with the Fed's target  support the implementation of a neutral monetary policy to stabilize the economy in the long term and to prevent an economic bubble.  Nonetheless, factors deserving close attention include the Fed signals toward future interest rate movements particularly the long term rates because they will reflect the path of the Fed policy rates in the next 1-2 years. In addition, if the Fed decides to significantly increase the long-term interest rates, the decision may create volatility in  global financial markets.

         With regard to any impact on Thailand, the Fed policy rate increase this time may adversely impact countries with weak external stability such as India, Indonesia and Brazil, which may suffer more fund outflows because some part of the funds may return to the US market due to lucrative interest rates. If it is the case, these countries may be forced to raise their interest policy rates to prevent fund outflows. Additionally, yields of bonds issued by the governments of emerging economies, including Thailand, may also rise. Nonetheless, Thailand is less likely to face sudden fund outflows when compared to those emerging markets because of its strong external status with over USD200 billion in foreign reserves, which is sufficient for the country to service international debts in the short run. Moreover, the outflow of international funds from the Thai capital market also depends on the monetary policy implementation of Thai authorities. Although  possible rate hikes by the Fed and the central banks in other ASEAN countries, including Indonesia and the Philippines, may add more pressure on Thailand's monetary policy implementation, Thailand has strong liquidity with a surplus of over THB2 trillion. These factors should enable Thailand's Monetary Policy Committee to maintain the policy rate at 1.50 percent for a while to support the continuation of the economic recovery.

International Economy