Rate hike inches nearer
BoT governor lends weight to expectations
Bank of Thailand governor Veerathai Santiprabhob has signalled an imminent hike in the policy interest rate, arguing that higher interest rates won’t be an impediment to economic growth and that the need for an ultra-loose monetary policy is less important.
Any monetary policy tightening will be data-dependent, he said, and a degree of monetary policy easing remains on the radar because interest rate normalisation may not continue.
Keeping the policy interest rate steady for prolonged periods can induce vulnerabilities and long-term risks in the economy, particularly from search-for-yield behaviour, Mr Veerathai said.
“There have been side effects from maintaining low interest rates for protracted periods,” he said. “Without caution, this could lead to economic vulnerabilities driven by search-for-yield behaviour.”
For instance, some companies have raised long-term funds from short-term unrated bonds, luring investors in search of higher yields, without regard for plausible risks, the governor said.
Some people have withdrawn money from deposit accounts and put it into savings cooperatives in the hope of reaping a higher return, regardless of the purpose for which the money would be used, Mr Veerathai said.
“Global interest rates are rising on average, with the domestic bond yield increasing in response to [expectations in] the global financial markets,” he said.
Thailand has kept its policy rate steady despite a series of rate hikes in neighbouring countries, including Indonesia and the Philippines, to stabilise domestic currencies and ward off rising inflationary pressure.
The seven-member Monetary Policy Committee (MPC) on Nov 14 kept the policy rate unchanged at 1.5%, where it has stood since a 25-basis-point cut in April 2015, but three voted for a quarter-point increase, up from two votes at September’s meeting and one in August and June.
The trio voted to raise the policy rate to curb financial stability risks that could affect GDP growth sustainability in the longer term, as well as to start building room for policy space.
Greater discrepancy in monetary policy deliberation adds to the likelihood that the first rate hike in more than seven years could occur at the MPC’s next meeting on Dec 19.
Rising interest rates will not affect t he domestic financial sector, Mr Veerathai said, as Thailand has excess liquidity without any external problems.
If a hike in interest rates happens, commercial banks will not need to adjust their benchmark l ending rates immediately because liquidity is still ample, he said. Finance Minister Apisak Tantivorawong said the central bank must assess the impact on financial stability, such as capital flows and foreign exchange, before embarking on a rate hike.
A 25-basis-point rate hike could affect the country’s borrowing cost in the realm of tens of billions of baht, Mr Apisak said.
“[Financial] stability is the essential point, while impact on investment is a minor issue,” he said.
RISKS AT LARGE
Although Thailand’s economic recovery momentum still prevails, external risks affecting Thai exports and inbound tourism must be closely monitored, Mr Veerathai said.
“Trade tariffs will incur greater effects going forward, and effects on Thai exports will materialise at the beginning of next year,” he said.
But the ongoing US-China trade disputes and tit-for-tat tariffs could result in “trade diversion”, which would have pros and cons for Thai exports, Mr Veerathai said.
For instance, US companies could seek other import sources besides China, while Chinese manufacturers could diversify their production bases to create a new supply chain.
Pipat Luengnaruemitchai, assistant managing director of Phatra Securities, said the five factors influencing Thailand’s interest rate outlook are the country’s economic growth trajectory, inflation, capital flows, interest gap and domestic financial stability.