When will the policy-makers end quantitative easing?

The market, however, took the view that it was a measure to slow the capital inflows that have been behind the strengthening of the baht in the past few months. The policy-rate reduction was considered too little too late, since many people expected more. The baht had gradually weakened from the low of 28.60 per US dollar to around before the MPC meeting and has traded above 30 since. 

In my opinion, the movement of the baht during the past month could not have been the reason for the policy-rate decision but it was the result of capital outflows from stocks and bonds. The market was a bit nervous when the US Federal Reserve chairman, Ben Bernanke, made a remark that the Fed would consider slowing down the purchase of private debt securities. The market interpreted this as meaning that the US central bank would consider stopping its quantitative easing (QE) programme. 

QE is a programme by which the Fed pumps money into the money market by purchasing private-sector debt securities. The programme aims to push the benchmark interest rate down to near zero. This programme has been used to stimulate the US economy. Policy-makers hoped that the near-zero interest rate would help the private sector and revive the US economy. 

However, the ultra-low interest rate also reduced the cost of holding risky assets. Basically, it is cheap to borrow money to invest in stocks, bonds, commodities and emerging markets. Therefore, during the past years under QE 1 through 3, we have seen stock, bond, commodity, and emerging-market prices go up. 

After Bernanke’s remark, stock and bond markets around the world felt the effect – a bond shock, as some put it. In Thailand we found that foreign investors sold some Thai stocks and bonds too. 

We could see that the market was very sensitive to such changes of policy, so policy-makers in such large economies as Japan and the United States need to have a proper strategy so as not to disturb the global market. In our own case, we need to be realistic that the current extreme easing of money supply is not going to last forever. Policy-makers will want to put an end to QE soon when they are convinced that their economies are back on track for recovery. 

There is some speculation that if the US Non-Farm Payroll registers an average increase of 200,000 jobs for the next four months, that would trigger the end of QE. The latest figure was 175,000 for May. Some say it will not be that soon, since the US unemployment rate has been around 7.6 per cent lately. 

What will happen when policy-makers put an end to QE? I think interest rates will rise. The US policy rate is near zero. The Japanese is also near zero (in fact has been for more than a decade), same as the European Union’s. 

When interest rates start rising, the bond market will be the first to feel the effect. Bond prices will go down. Investors around the world will then reallocate their investments, including those in the emerging markets that have been seeing strong currencies as an effect of capital inflows. 

We should now prepare measures to deal with the reversal of the capital flows that will affect our market and the currency’s value. 

 

_ Padej Piroonsit is head of Global Sales, CIMB Thai Bank plc. He can be reached at [email protected]

This article reflects the writer’s own opinions and not necessarily those of CIMB Thai Bank.