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Published on July 31, 2007

The 7-12-month deposit accounts as of May accounted for 16.4 per cent of total accounts, increasing from 15.6 per cent in the first quarter. The 12-month deposit accounts were up to 8.9 per cent of the total, from 7.6 per cent in the two previous months, the Bank of Thailand (BOT)'s inflation report said.

The change in public preference has been attributed to expectations that interest rates will continue to decline. As a result, depositors have shifted to longer-term deposit accounts, which offer higher interest rates, to lock in returns.

"Although long-term deposit interest rates, such as the 12-month rate, will decline to be on par with short-term rates, depositors still expect decreasing rates," said the July report.

In the second quarter of the year, most commercial banks have slashed interest rates, taking the cue from the policy interest rate. Deposit interest rates have shown a rapid decline rather than lending rates.

The four largest banks' 3- to 12-month deposit rates were lower on average by one percentage point from the first quarter to 2.25 per cent, equal to the decline in the key interest rate. But 24-month deposit rates declined more, indicating that the market expects the lowering of interest rates to continue. 

According to the report, financial institutions' deposits have grown at a sustainable pace after a continuing slowdown since the middle of last year.

As of May, deposits expanded by 5.7 per cent on year, the same level as at the end of the first quarter.

Business and household deposits have continued to slow down but public sector deposits have increased over the past few months, due to an acceleration of budget disbursement.

Meanwhile, financial institutions' loan growth in the second quarter continues to slow down from the previous quarter due to sluggish investment. But lending to the household sector expanded at a satisfactory pace, with total loans as of May growing by 2.4 per cent on year, compared with 2.6 per cent in the first quarter.

The banks have not cut their lending rates much to maintain net interest income amid flooded liquidity in the system.

The rapid declines in deposit rates have also caused real deposit interest rates to fall sharply. At the end of the second quarter, the 12-month real deposit interest rate was 0.23 per cent a year as the real MLR was down to 5.10 per cent, due to a slower decline of inflation.

Anoma Srisukkasem

The Nation