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15 Jul 2010

Financial Markets

Bullish Interest Rate Cycle Starts (Business Brief No.2880)

After the Monetary Policy Committee (MPC) of the Bank of Thailand (BOT) resolved to raise their policy rate at their meeting on July 14, 2010, which was the first increase in their key policy rate since September 2008, some banks announced increases in their fixed deposit rates to 0.10-0.55 percent on July 15, 2010, and raised their loan rates to 0.125-0.15 percent on the following day. These new interest rates will be effective July 15-16, 2010.
In addition to commercial banks' attention to be responsive to the BOT policy rate hike, the purposes of maintaining competitiveness and customer base should also support the commercial banks' interest rate decision, while reflecting their confidence toward continued economic, and loan growth. To this end, liquidity seems to be less important to their decision-making. Despite adjusting lower, liquidity of some banks remains quite high.
Although the magnitude of the latest BOT interest rate increase was relatively low, it represents a start of new upwardinterest rate trend. Thai banks will likely see the opportunity for more deposit and loan rate increases over the remainder of this year, particularly if the Thai economy and loan growth remain positive. Meanwhile, the BOT is signaling higher policy rates and greater absorption of liquidity from the banking system amid intensifying competition among Thai commercial banks.

That is to say, borrowers – particularly SMEs – may face floating loan rates, and thus should adjust their business plans to effectively cope with increased financial costs later on during an upward interest rate cycle. On the other hand, depositors would enjoy higher returns on their savings.

Financial Markets