• 
• 

Published on August 4, 2007

The market anticipates the Bank of Thailand slashing its policy interest rate by another quarter percentage point before the year ends, both to rein in baht appreciation and following US interest-rate cuts designed to fight off that country's crisis in sub-prime mortgages.

The yield curve for bonds of more than five years is projected to move up, but fixed-income investors are recommended to go deep into short-term bonds while waiting for a more stable market.

Somjin Sornpaisarn, managing director of One Asset Management, said the repurchase rate was likely to take a cut of 25 basis points by the end of the year to steer the baht to a soft landing and real deposit rates to a higher level.

A rate cut would not aim at cracking down on inflation and boosting the economy. Inflation has already been tamed while the economy has been performing well, as recognised by the central bank's upward revision in its growth forecast to 4-5 per cent.

"If there's no currency pressure, the central bank might not have to cut the rate. But I believe that the need to cut the rate remains," he said.

Paritat Lerngutai, managing director of SCB Quant Asset Management, said the key interest rate would possibly be lowered slightly to contain the rising baht, which could keep getting stronger. The reduction might need to be in line with a possible US rate cut to tackle the sub-prime home loan problem.

The rate cut would also help fire up the economy, as commercial banks have not done much lending, while inflation has been low, he said.

There was a risk if the US real estate meltdown had a widespread impact, but the US government should be able to work out the problem eventually despite the mess not yet improving.

"Whenever the central bank cuts the rate, the baht will respond to the signal by getting weaker," he added.

But Nattapol Chavalitcheevin, president of the Thai Bond Market Association, believes the monetary policy rate has already bottomed out now that the central bank has upgraded economic growth prospects. But market rates still had room to head lower, depending on the liquidity of each bank.

The bond yield curve is more reasonable, flatter than at the beginning of the year, when long-term bond issuers benefited. Looking forward, the yield curve is expected to move slightly, with decreases in short-term yields, so long as there is no unusual volatility in capital flows, he said.

Despite the central bank's relaxation of withholding reserve requirements, foreign investors have not shown much interest in the bond market, due to low returns and credibility, he said. The weakening US dollar should reverse its trend in two years when the American government rectifies the current-account deficit.

Somjin said investors should concentrate on short-term maturing bonds to reduce market risk from the volatile yield curve. The yield curve will possibly accelerate on greater supply when the government issues Bt200 billion of bonds in the next fiscal year.

Also adding to the supply would be the Financial Institutions Development Fund to refinance its debts and the government to finance its mega-projects.

Investors should also take into account bond risks from baht volatility, some companies' credit ratings and the US sub-prime problem, he said.

Anoma Srisukkasem

The Nation