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7 Jun 2005

Financial Markets

BOT's Interest Rate Policy: Likely Edging up to 2.50 Percent

Kasikorn Research Center (KRC) expects that the Monetary Policy Committee of the Bank of Thailand (BOT) will resolve to hike the 14-day R/P rate by another 25 basis points from 2.25 percent to 2.50 percent in its fourth meeting of this year slated for June 9, 2005. The central bank's benchmark rate increase is set to be a pre-emptive strike against possible rising inflation domestically. Meanwhile, the Thai economy is expected to see higher growth over the latter half of this year, driven by public spending and a revival in tourism, which should help private business to cushion the adverse effects caused by the BOT's gradual increase in interest rates.

An interest rate increase of another quarter point in the forthcoming MPC meeting is unlikely to be followed by a changing direction in commercial banks' key deposit and lending rates, or a sudden rise in debt burdens of the private sector, due to a glut of excess liquidity in the banking system. However, the BOT's tightening in interest rate policy may send a signal to consumers to adjust themselves through reducing imbalances and turning to saving more, which would be a boon to Thailand's current account balance in the future. Meanwhile, the BOT's raising of interest rates would also help to maintain the interest differential between Thai and US interest rates, so that there would not be too wide a gap (particularly under the condition that the US Federal Reserve System may raise their Fed Funds rate to 3.25 percent in the meeting at the end of June). This would be favorable to maintaining the net balance of capital movements and the Baht value to not fluctuate too seriously.

Although the anxiety of slowdown in the Thai economy may have become more evident now, efforts to maintain many aspects of economic targets, including inflation targeting and the status of the current account, as well as economic growth ? using a single bullet which is changing the direction of benchmark rates ? will be a difficult task for the BOT amid the present economic environment. Therefore, KRC views that in the meeting on June 9, the BOT may need to set priority to economic stability (taming inflationary pressure and the current account deficit). In this case, raising interest rate sooner is better than later, in the wake of uncertainties regarding oil price directions.

Financial Markets