Policy rate cut won't unsettle banks

He expects the central bank’s Monetary Policy Committee (MPC) to lower the benchmark rate amid low inflation, mainly from the plunge in crude-oil prices.

But banks are unlikely to cut their own interest rates quickly, as there is plenty of liquidity, while the United States is not expected to increase its benchmark rate soon because of the slow growth of the global economy.

However, the market should remain vigilant next year on the volatility of foreign exchange when the US does finally announce an interest-rate increase. Banks should tell business clients to prepare for this by adjusting their short-term borrowing to long-term to continue benefiting from the current low cost of funds.

The TBA expects the US will raise its policy rate by the end of next year of early in 2016. Boontuck said the Thai economy was expected to resume growth in the second quarter of 2015, but the improvement would not be particularly sharp as long as the global economy was still fragile, as proved by the plunge in the oil price.

The decline in the oil price reflects the actual picture of the global economy since the crisis of 2008. There is a massive amount of liquidity in the global market carried by the stock markets.

Thailand is well placed to remain competitive thanks to the Asean Economic Community, for which this country should have laws that support investment, logistics and human-resource development in order to keep its advantage in this region.

He said the TBA would this week propose two amendments related to guarantees in the Civil and Commercial Code to the BOT to help borrowers. The new code will take effect on February 11, and will favour guarantors.

One of the amendments to be proposed by the TBA is that banks can undertake debt restructuring without requiring permission from the guarantor, which could reduce the negative impacts of the new code on borrowers.

Second, when borrowers and guarantors allow banks to sell their assets by auction, this process must be approved by the Legal Execution Department in order to make it transparent, he said.

 

Change to ATM cards 

He said the TBA next year would urge banks to change all of their ATM cards from magnetic strips to embedded chips to prevent skimming. All ATM cards should have chips by January 2016.

Meanwhile, Somchai Amornthum, executive vice president for research at Krungthai Asset Management, said economic growth slowed in the third quarter because of the poor performance of the export sector, and lowering the policy interest rate would not help the economy at this time.

He expects exports to be better next year from the predicted increase of global demand while higher government spending should help gross domestic product expand by 5 per cent.

Somchai expects inflation to remain at the current low level despite the fact that lower fuel prices resulted from supply factors and not the demand side. The falling global oil prices should encourage domestic consumption once Thais start to see the effect on their purchasing power.

The core inflation rate stood at 1.6 per cent as of November, around the middle of the BOT’s target of 0.5-3 per cent, while headline inflation was 1.26 per cent year on year.

He believes that the MPC might increase the interest rate by 0.25 percentage point in the third quarter of next year and another 0.25 in the fourth if GDP growth is where the BOT expects it to be. Prolonging low interest rates could exacerbate the current problem of high household debt, which was at 83.5 per cent of GDP at the end of the second quarter.

Apichat Wisitkitchakarn, an economist at Tisco Financial Group, expects the MPC to maintain the policy rate at 2 per cent, since lowering it would not spur exports. Though still sluggish, shipments are currently being helped by the depreciation of baht, while lowering the policy rate any further might affect the country’s financial stability because of the high level of household debt.

Tisco expects the MPC to maintain the interest rate at 2 per cent throughout next year despite an improved economy, he said. It bases this prediction on the prospect of the United States increasing its benchmark interest rate midyear, sooner than expected previously.

He explained that the gap between the Thai and US interest rates would be too narrow if the MPC increased the local rate next year, which would encourage an outflow of capital. This should deter the committee from such an action.