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3 Jun 2008

Financial Markets

Upward Interest Rate Cycle Finally Starts (Business Brief No.2188)

On Friday, May 30, 2008, a large commercial bank announced that fixed deposit and lending rates would be increased across the board. It is expected that other banks may soon follow suit. This reflects that a bullish interest rate cycle has finally begun.
KASIKORN RESEARCH CENTER (KResearch) attributes the move to the need to maintain depositor bases by commercial banks, plus declines in their liquid assets following higher growth in credit than deposits during the first four months of this year, in addition to their liquidity preparations for a large amount of special deposit products and bills of exchange (B/E) that will reach maturity soon. The fact that commercial banks have opted to lift fixed deposit rates across the board rather than launch special deposit products that are more cost-effective may reflect their belief that there will be significant decreases in liquidity in the future, and/or the bottoming out of domestic interest rates will occur shortly. Therefore, this is the right timing to lock-in the lowest net funding costs.
In parallel, lending rates were also hiked by large commercial banks. This may worsen private sector credit demand and loan quality that have already been plagued by inflationary pressure and political uncertainties. KResearch, therefore, forecasts that the commercial bank interest rate trend may hinge on economic developments– which are the key to determining how effective existing borrowers or prospective loan applicants will be able to cope with rising lending rates. If the economy remains weak, with fragility in private sector confidence, NPL problems and credit demand at commercial banks may be at risk, which may result in only a short upward interest rate cycle and a moderate magnitude of rate increases. (The present upward interest rate cycle may be shorter than the previous one which lasted from November 2004 to August 2006, or one year and 10 months, and saw a total increase of 4 percent in the one-year fixed deposit rate.) This does not take into account any case where unexpected events erupt that could seriously affect liquidity in the banking system and lead to rivalry in rate hikes among commercial banks to maintain their liquidity.
In another scenario, if improvements emerge in the economy, especially to the domestic political situation and inflation, or the government's efforts to revive the economy through accelerated budgetary disbursements and new economic stimulus programs bear fruit, economic growth may finally prevail and liquidity in the system will be gradually decline. In such a situation, the upward interest rate cycle could last longer than the first scenario.

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