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10 Mar 2010

Financial Markets

MPC Signaling Upward Interest Rate Trend (Business Brief No. 2776)

The Monetary Policy Committee (MPC) of the Bank of Thailand resolved at the MPC meeting on March 10, 2010, to keep their 1-day repurchase rate (the policy rate) unchanged at 1.25 percent. This result was in line with the forecasts of many analysts. Although the MPC resolved to keep the policy rate unchanged, the MPC' s post-meeting statement implied a more positive point of view toward the Thai economy.
The MPC stated that ;the lower downside risk to growth has significantly lessened the need for an exceptionally accommodative monetary policy stance, at present," which seems to be a more overt signal toward an impending upward trend in Thai interest rates.
Although such increases in their key policy rate would likely happen in 2H10, it is possible that the increase might occur earlier at the end of 2Q10, particularly if the upcoming mass anti-government rally ends peacefully, domestic spending recovers in due course and the global recovery shows more stability. KASIKORN RESEARCH CENTER (KResearch) forecasts that pressure on the upward policy rate trend will increase when Core Inflation rises continuously at the end of 2Q10 to the beginning of 3Q10. At that time, it is possible that the Thai policy rate would be lower than the Core Inflation rate.

However, KResearch estimates that the MPC is likely to increase policy rate gradually in order to adjust their current exceptionally accommodative monetary policy stance to be more normal levels. Amid a situation where the policy rates of many Asian countries, including Thailand, may increase before the US policy rate rises, it is expected that the Thai financial markets will have to brace for an upward interest rate cycle that could arrive even sooner. Higher interest rates would imply that Thai bond yields would also rise, in tandem with the stronger Baht trend that coincides with other Asian currencies.

Financial Markets