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6 Aug 2007

Financial Markets

FOMC Meeting, August 7…Fed Likely to Hold Interest Rate at 5.25 Percent (Business Brief No.2024)

KASIKORN RESEARCH CENTER (KResearch) expects that Federal Market Opening Committee (FOMC) is set to keep the Fed Funds rate unchanged at 5.25 percent in the 5th meeting slated for August 7, 2007. It is likely that Fed may place greater weight on inflationary pressures that have yet to show any clear signs of abating, as hoped, though more signs of an economic slowdown have emerged in the US. Even so, recent US economic indicators are still far from serious, making it unlikely for the Fed to adopt an easing monetary policy in the near future. However, Fed may opt to reduce their key rate by the end of this year, in particular, after the release of weaker-than-expected Non-Farm Payrolls and an ISM (Institute for Supply Management) Services Index in July as well as concerns over problems in the US sub-prime mortgage market that may spread into other economic sectors. Therefore, what should be closely monitored is developments in US economic indicators, including inflation, as well as the Fed's post-meeting statement to shed light on the outlook of US interest rates.

For the impact on Thailand, the direction of the Fed funds rate is regarded as a factor although it is not the main factor which the Monetary Policy Committee will consider in the interest rate policy of Thailand. The fact that the US economy is sluggish may pressure the US Dollar to depreciate continuously against other key currencies, including the Baht of Thailand. The stronger Baht might affect the competitiveness of the export sector and the economic growth of Thailand. In addition, it might affect the interest rate policy of the Monetary Policy Committee as it did in the previous meeting on July 18, 2007.

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