By Wichit Chaitrong
CENTRAL BANK governor Veerathai Santiprabhob has signalled a hike in policy rates, saying keeping the rate ultra low is unnecessary, and that the hike will not necessarily lead to commercial banks increasing their lending rates.
Interest rates in the Thai bond market have already risen in line with global trends, as many countries led by the US have increased their policy rates, Veerathai said yesterday at an annual forum held by the Thammasat Economics Association.
The Bank of Thailand (BOT)’s monetary policy committee (MPC) will be meeting on December 19 to determine whether the policy rate should be increased from the current level of 1.5 per cent. There has been speculation that there is a high chance of the central bank increasing interest rates in the next meeting, after the MPC voted 4:3 to maintain the rate in the last meeting.
“Though MPC members voted differently, they all agree that an ultra-low interest rate is not necessary,” Veerathai said.
Even if the central bank increases the interest rate, it will still make way for economic growth and it does not mean that the rate will keep rising, he added. Rate increases will depend on data, as the BOT will take into account changing economic conditions, Veerathai explained.
He also believes that if the MPC does decide to increase the rate in the next meeting, it will not lead to commercial banks increasing their lending rates right away. Commercial banks have plenty of liquidity and are unlikely to increase basic rates such as minimum loan rate, minimum overdraft rate or minimum retail rate.
Usually, commercial banks can make profits more easily during the interest-rise cycle, he said. The central bank has maintained its policy rate for about four years, while other central banks in Asia, such as Indonesia, have increased their policy rates several times, after the US hiked its rate to 2.25 per cent. The rate in Indonesia now stands at 6 per cent. It is unusual for Thailand to have policy rate lower than that of the US.
Also domestic savings and a high current-account surplus protected Thailand from severe capital outflows when the US Federal Reserve increased its policy rate, which in turn allowed the country to have lower interest rates. The US had increased its rate as it tried to normalise its policy after keeping its rate unusually low in the wake of the 2008-global financial crisis.
High level of non-performing loans
A low interest-rate policy has side effects, as people are searching for high-yield investment. In Thailand, the central bank has spotted high non-performing loans in mortgage lending as banks compete against each other for market share and home buyers bet on property prices, he said. The central bank plans to put a limit on loan to value (LTV) for second and third mortgage contracts, ordering banks to lend only 80 per cent of the property’s price.
He also warned private companies to prepare for a highly volatile global financial market next year. A global rate hike and slowdown could affect countries having high debts, he said.
In the next two years, many emerging market economies have to roll over their huge debts, which could trigger capital outflows from emerging market if creditors worry about their debtors’ ability to repay, he warned.
Veerathai also voiced concerns about the impact of the US-China trade war.
“The impact on Thailand will be more pronounced early next year,” he said, referring to a 8.7-per-cent export growth in October as importers accelerate their shipments to avoid higher tariffs in the future.
There are both negative and positive impacts. US importers may buy more Thai products, though Chinese exporters may also dump the products they cannot sell in the US in Thailand, which in turn could adversely affect local manufacturers, he said.
In the long run, Chinese manufacturers may relocate their production base to other countries, including Thailand. So, the Eastern Economic Corridor investment project may benefit from a changing trade scenario due to the trade war, he explained.
Pipat Luengnaruemitchai, assistant managing director at Phatra Securities, shared Veerathai’s view, saying that trade war creates uncertainty and most economies, apart from the US, have entered a slower growth period. Thailand’s growth rate will slow to 3.7 per cent next year, from an estimated 4.3 per cent this year, he added.