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9 Jul 2010

Financial Markets

Thai Interest Rates at the Turning Point (Business Brief No.2873)

KASISKORN RESEARCH CENTER (KResearch) holds the view that the Monetary Policy Committee (MPC) meeting may resolve to raise their key policy rate from the current ultra-easing 1.25 percent to 1.50 percent during their fifth meeting of this year slated for July 14, 2010. However, the odds seem to be equal for the MPC to keep their benchmark rate unchanged in that meeting before raising it in the following meeting on August 25, 2010.
Regardless of the MPC meeting's resolution, KResearch views that a lapse of six weeks between the two meetings may not make much difference in normalizing the BOT key policy rate against a backdrop of manageable economic growth over the remainder of the year and accelerating inflation, especially next year. Such action, if it occurs, would be consistent with the tightening stances adopted by other central banks in the Asia-Pacific region.

As for the impact of any BOT rate hike on interest rates in the banking system – i.e., funding costs – KResearch is of the view that in addition to the resolution at the forthcoming MPC meeting, movements in financial markets may hinge on MPC signals toward their policy rate long-term view over the rest of this year. Also, their perspective toward the economic outlook at home and abroad may affect investment in different asset classes. The trend of commercial banks' interest rates may depend on their ability to extend new credit, as well as monetary policy mechanism for liquidity absorption via a variety of tools. In our view, if the MPC raises their policy rate, commercial banks will likely follow suit by raising their deposit and lending rates. However, timing and the magnitude of such hikes may depend largely on our economic health, competition in the market and possible liquidity management actions taken by the BOT.

Financial Markets