Fed Policy Rate Expected to Remain at 1.50-.175 in May Meeting…Continued Rise in US Bond Yield to be Monitored (Business Brief No.3739)

​       KResearch expects the Federal Reserve (Fed) will resolve to maintain its policy interest rate at 1.50-1.75 percent in its third meeting of this year, in awaiting to assess further developments of the US economy and risks arising from trade disputes. Given the US attempts to minimize their trade deficits with many countries, their import duties may be raised again, especially for imports from China. If the two countries cannot reach a satisfactory conclusion on their trade relations, higher import duties imposed by the US will become in effect at the end of May 2018, which will most likely affect their economic developments and inflation directions. Therefore, the Fed will have to keep a close watch on that situation.

        Another important factor that should be observed is the US Treasury's public debt management plan scheduled for announcement on May 2, 2018, as it may be a pressure on the US Government Bond yield to rise. On April 25, 2018, the 10-year yield climbed to a four-year record high at 3.0 percent, rising approximately 0.7 percent over the beginning of 2018 and suggesting that the policy rate may be raised more than three times this year. However, the bond supply that may increase could also be another factor resulting in further increases in the yield. This scenario will likely induce a new round of fluctuations to financial markets, while pressuring financial costs worldwide to surge gradually.

          For Thailand, Thailand's bond yield has become lower than that of the US, causing some fund outflows from stock and bond markets, and Thai Baht depreciation. Financial costs in Thailand, particularly related to fund raising in the capital market, could step up in line with rising interest rates in global markets. Meanwhile, there will likely be more factors that may bring about volatile capital movements in the near future. Nevertheless, domestic loan rates in Thailand are expected to remain unchanged, in alignment with our policy rates. Therefore, the business sector should have in place fund raising plans or should revise the structure of their fund raising in bond markets for a longer term in order to lock-in their financial costs while they are still at low levels.