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27 Jul 2022

Financial Institutions

Impacts on the Thai banking system if banks defer interest rate increase (Current Issue No.3338)


        A signal from the Monetary Policy Committee (MPC)’s meeting in June 2022 indicated that an upward trend of the Thai policy rate is imminent. Rising domestic inflationary pressures may cause interest rate hikes over the remainder of this year and extending into early 2023.

        The trend of net interest margin (NIM) in the Thai banking system, especially in 2023, will be directly affected by the selected timing and pattern of any interest rate hikes. Under normal conditions, increasing fixed deposit rates in tandem with lending rates will have a positive impact on the NIM of commercial banks. As evidenced, approximately 55-70 percent of total loans are offered based on floating rates, so banks will enjoy immediate benefits in the quarter when benchmark lending rates – i.e. MOR, MLR and MRR – are raised. Meanwhile, fixed deposits presently account for approximately 25 percent of total deposits. Commercial banks will gradually recognize the increasing costs after existing fixed deposits reach their maturity – in the next 3, 6, or 12 months.

        However, amid the current situation of a highly uncertain economic recovery, KResearch projects that fixed deposit rates are set to be raised first (or shortly after the policy rate hike), while benchmark lending rate increases may be deferred so as to assist customers. Assessing the initial impacts on the NIM in the Thai banking sector, KResearch notes that in the scenario that benchmark lending rates are maintained for another 3-6 months, effects on the NIM will become apparent in 2023 as commercial banks will gradually recognize the increases in the costs of fixed deposits in line with deposit rates raised during the third and fourth quarters of 2022. The deferral of benchmark lending rate increases for 3-6 months will affect the NIM in 2022 by approximately 0.04-0.06 percent, and in 2023 by approximately 0.08-0.18 percent, when compared to the scenario in which fixed deposit rates and lending rates would rise in line with the policy rates under normal conditions.

Financial Institutions