Local short-term interest rate expectations stabilising
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The local policy interest rate is heading for a period of stability, after several years of big swings.
The policy rate is the overnight interest rate set by the Bank of Thailand, acting as a base for other rates in the market. From July 2010 to August 2011, the central bank raised this rate from 1.25 to 3.50 per cent, to control inflation and to reflect a recovering economy. Then, after the devastating floods late last year, the central bank quickly cut its policy rate twice to help boost economic growth.
Recently, however, senior Bank of Thailand officials have given signals that we are heading to a more “boring” phase.
Time after time, the central bank has reassured markets that the current policy rate of 3 per cent is an appropriate level to support growth. Officials also noted that inflation is not an issue at the moment, though it may accelerate in the second half of 2012.
All those signals cemented market expectations that the policy rate is not likely to change anytime soon. It also eliminated any lingering hopes that the central bank would cut its rate further; consensus now is that the next (eventual) move will be upwards.
Thailand’s latest economic data releases are consistent with this rate outlook.
The flood crisis last year had a huge negative impact on the economy, leading to full-year 2011 GDP growth of only 0.1 per cent. In the past few months, many figures (such as business sentiment, tourist arrivals, and private consumption) have shown a reasonable recovery and positive trends. While it may take some time for everything to get back to normal, prospects appear good for much-improved GDP figures in 2012.
This sentiment is also being reflected in financial markets, with investors pricing out further rate cuts, and expecting steady short-term rates. Local short-term interest rates had been on a falling trend since October, but that trend has now stabilised and is slightly reversing. Benchmark six-month bond yields fell to a low of 3.04 per cent in late February, but have since risen slightly. Inter-bank interest rates (such as the six-month BIBOR) have been on a similar trend.
As the central bank itself has noted, there are several risk factors to this story.
Is inflation truly under control? If the economy improves faster than expected, and if consumer spending accelerates, then both the core and headline Consumer Price Index could increase rapidly. This could lead to some pressure for rates to rise.
On the flip side, there are risks to global economic growth. Some indicators are showing a weakening trend in key areas such as Europe and China. A sharp global slowdown would inevitably hit Thailand as well.
Monetary policy from the Federal Reserve (the central bank of the United States) is also an area of uncertainty. While this may have limited direct impact on the local rates decision, it adds much volatility to global and local financial markets, and could also affect the amount of financial flows coming to Thailand in the future.
Parson Singha is chief markets strategist, Global Markets Department, HSBC Thailand.
