Soft monetary policy expected to continue in Europe, Japan

The Bank of Thailand expects the European Central Bank and the Bank of Japan to continue with their relaxed monetary policies for the time being. 

The BOT also believes that the ECB and BOJ will increase the use of unconventional monetary policy amid the weak economic recoveries and low inflation in their respective jurisdictions.

Meanwhile, the US Federal Reserve has shown clear signs that its benchmark interest rate will be on an upward trend from now on. This has caused a policy divergence among the major economies, so a more volatile global fund flow is expected. 

However, emerging Asian markets should be able to cope with this, since their financial stability is better than in other regions, according to the Thai central bank.

BOT spokesman Chirathep Senivongs Na Ayudhya said the latest statement from the ECB showed that it is committed to maintaining confidence as inflation is lower than expected. The factors that could encourage the ECB to relax its monetary policy even further would depend on the amount of loans from the second offering of long-term refinancing operations in December.

 

More asset purchases seen 

“If the amount of loans from the second round of TLTROs in December is lower than what the ECB expected, it would need to buy more assets to meet the targets on its balance sheet,” he said.

Pimonwan Mahujchariyawong, deputy managing director at Kasikorn Research Centre, also believes that the ECB is likely to maintain its relaxed monetary policy at its next meeting. The economic indicators from many European countries are still below par and the global economic recovery is still fragile, while the ECB still has room for further policy relaxation.   

The ECB left interest rates on hold at its last meeting by keeping the refinancing rate at 0.05 per cent, marginal lending rate at 0.30 per cent, and deposit rate at minus-0.20 per cent.

As for Japan, Chirathep said the BOJ’s “Q-squared” (quantitative and qualitative easing) policy to increase its monetary base to 80 trillion yen from the previous level of between 60 trillion and 70 trillion yen would help lower risks from the slowdown attributed to the increase of its value-added-tax rate. The BOT will keep an eye on whether Japan will increase its VAT rate again next year, since the country’s fiscal restructuring could affect the recovery of its economy.

 

Higher VAT 

Japan raised its VAT rate from 5 per cent to 8 per cent in April and the markets expect a further increase to 10 per cent in October next year, Pimonwan said.

Regarding the Stock Exchange of Thailand’s request for stock trading in US dollars, the BOT said this issue covered various areas such as the trading mechanisms of the market in which the central bank has little involvement except on the exchange rate and the movement of funds. It foresees that traders with income or cash flow that is already in a foreign currency would not have the hedging risks from trading stock in baht. If the issue involves the appropriate bracket of transactions, the BOT will study the proposal in more detail before commenting any further.

SET president Kesara Manchusree said last week that the bourse was preparing to put in a request for the Finance Ministry to allow foreign-currency payment for stock transactions in order to increase the exchange’s competitiveness against the bourses in Malaysia and Singapore, which have long allowed this.