After the Bank of Thailand (BOT) increased the 14-day repurchase rate by 25 basis points to 5 per cent, it sent signals that the rate-hike series would end. Siam City Securities anticipates, however, that the policy rate will peak at 5.25 per cent, considering that the inflation rate this year is 5.25 per cent.

The securities firm believes the inflation rate will decline in the third quarter while core inflation will not exceed 3 per cent, thus not exceeding the 3.5 per cent of the central bank's target.

SCIS believes that the central bank will reduce its rate-hike pace due to a slowdown in consumption and investment. In the first quarter private consumption grew by 7.1 per cent year on year, which is flat compared to the fourth quarter last year.

Public spending in the same period declined by 0.7 per cent year on year, down from 7.8 per cent in the fourth quarter last year. The private consumption index in April declined significantly to 118.6, down from 122.1 in March due to a decrease in car sales. The current-account deficit also shows an economic slowdown.

According to SCIS, the impact from rate increases is apparent in asset prices, particularly in the bond market, where yields have increased. Thai stock prices also fell, while a gentler pace of rate hikes will reduce pressure on stock prices.

Higher interest rates will control inflation pressure and boost real deposit rates into positive territory. However, the cost of funding will rise and affect bank lending while consumption and investment will fall. Thus there will be negative impact on the banking, property and construction sectors.

SCIS said the property sector had been affected significantly, in particular land-developers, as banks were more cautious in lending. Lending for the property sector recorded a higher rejection rate of applications to 15-20 per cent this year from 10-15 per cent last year. In addition, newly transferred houses declined to 5,000 per month at present, down from 6,000 in 2005.

Consumers have also been affected by a 3- to 5-per-cent higher cost of living while the inflation rate also rose. Thus consumers have been hesitant to buy houses, while the construction costs of land-developers also increased.

SCIS forecast the property sector would grow only 5-7 per cent this year, a decline from 10-12 per cent last year. Medium- and lower-quality housing will record the highest growth this year due to real demand, while the condominium market will grow again at the end of this year.

With rising cost of funds, banks will increase lending rates again. Large banks' minimum lending rate is likely to rise to 7.75 per cent, from the current 7.5 per cent.

Siriporn Chanjindamanee

The Nation