Markets increasingly look to local interest rate bench

The most basic is the Bank of Thailand’s policy rate. This is the overnight repo rate, short for repurchase agreement, which the central bank sets at its regular policy meetings to influence other short-term interest rates in the market.
Many bank customers are familiar with standard board rates such as the FDR (fixed-deposit rate) and MLR (minimum lending rate). However, these rates are not very reflective of market conditions.
Financial markets use several other rates as key benchmarks.
The two most prominent are the THBFIX (Thai Baht Interest Rate Fixing) and BIBOR (Bangkok Inter-Bank Offered Rate).
The former is historically more important, but the latter is becoming more appropriate for this era.
Thailand has always been a relatively open economy, welcoming foreign investment and trade. This has meant that the foreign-exchange market developed more rapidly than the local interest-rate market. Currency-related products such as forwards and swaps became widely available far in advance of local inter-bank loans.
Hence it was easy to create (or imply the creation of) Thai baht funding – by borrowing US dollars and swapping the proceeds into the baht.
The market quotations involved in those two transactions were actually more transparent and liquid compared with getting baht lending rates from Thai money markets.
All that led to the creation of THBFIX – the interest rate implied from borrowing US dollars in Singapore and swapping into baht. THBFIX became the main short-term rate benchmark in local financial markets.
Note the past tense. All that has passed, and what used to be is no longer so.
The main problem with THBFIX is that it does not reflect local market conditions.
The interest rate is the cost of money, and like all products it is driven by supply and demand.

WILD FLUCTUATIONS
Ever since the global financial crisis of 2008, liquidity conditions of US dollars in offshore markets such as Singapore have fluctuated wildly. This has led THBFIX to be very volatile.
The ad hoc development of THBFIX also means that there is no authority taking ownership of the rate. This issue has become even more important in this age of greater regulatory oversight.
Meanwhile, local inter-bank interest-rate markets have developed significantly over the past 10 years. In particular, there is now a clear inter-bank rate, BIBOR, overseen by the Bank of Thailand.
This rate depends on local factors such as baht liquidity and local interest-rate expectations.
In the past five years, BIBOR has been much less volatile than THBFIX and has much more closely tracked the central bank’s policy rate.
After combined efforts from the central bank and local commercial banks, the volume of financial transactions using BIBOR has risen tremendously since 2011, both in inter-bank markets and for customer lending.
Besides borrowing, BIBOR is also becoming more widely used in other activities.
There are floating-rate bonds issued by both the central bank and the Finance Ministry that are denominated in BIBOR to provide options for bond investors who do not want to receive a fixed rate.
BIBOR is also starting to be used more as a benchmark in interest-rate swaps and is also available as a futures product.
Global markets remain uncertain, with very aggressive monetary-policy measures from the major central banks. These are likely to continue to cause volatility in US dollar offshore liquidity and in regional forex markets. Hence the backdrop for THBFIX remains uncertain and the comparative advantage of BIBOR is likely to grow.

Parson Singha is chief strategist for global markets at HSBC Thailand.