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12 Apr 2005

Financial Markets

BOT's Interest Rate Policy Confronted with Restrictions


Since the Bank of Thailand (BOT) resolved to lift its benchmark 14-day R/P rate from 1.25 to 1.50 percent, the first time in more than one year, from the Monetary Policy Meeting (MPC) on August 25, 2004, to the MPC meeting on March 2, 2005, the BOT continued to raise the key rate four times at 25 basis points on each occasion, totaling 1.00 percent in the five rounds of meetings. This has brought the total rate up to 2.25 percent. The central bank has been quite successful in achieving what it hopes will maintain price stability as well as the inflation rate that is now within the inflation targeting framework. This can be seen from the core inflation rate that remains at the lower end of the inflation targeting range, being 0-3.5 percent, and the Baht that remains within the same range as most regional currencies. However, taking into account the direction of other quantitative measurements following the one-percent hike in BOT's policy rate, including accelerating growth in the monetary base, rising liquidity of commercial banks and other interest rates in the Thai financial system that have yet to rise much in line with the BOT's policy rate, this indicates that to pass on the effects of monetary policy via tightened interest rates to the real economic sector may not bear fruit as it should, although the central bank has played a greater role in managing and absorbing some liquidity out of the system. The total borrowing volume in the repurchase market (of the Bank of Thailand and the Financial Institution Development Fund), outstanding BOT bonds and the net Forward status, which totaled around Baht750 billion in August 2004, increasing to Baht940 billion in February 2005, and Baht1.04 trillion in March 2005.

Therefore, KRC views that under the current complication of economic environment, highlighting increasing inflationary pressure, maintaining price stability should urgently be given as the first priority. In these circumstances, the BOT may be needed to increase liquidity management and absorption through its three major tools, this would ensure that quantitative measurements, including both monetary base and liquidity, will decrease significantly to an appropriate level where monetary transmission mechanism becomes more effective.

Financial Markets