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Published on March 13, 2008

The US Federal Reserve move to pump in US$200 billion (Bt6.3 trillion) to bail out cash-strapped financial institutions will not affect local policy rate movements, which depend largely on domestic factors including oil prices and price stability, experts said yesterday.

Wall Street stocks rallied following a joint-effort on Tuesday by the Fed and other major central banks to provide cash for an embattled banking system.

The Fed has augmented the Term Auction Facility (TAF) with a Term Securities Lending Facility (TSLF), to lend up to $200 billion in treasuries. It is the biggest advance in more than five years to primary dealers for 28 days as well as to accept a wide range of collateral including mortgage-backed securities.

However, Thai economists fear the US measure will mainly tackle its liquidity crunch but not address the fundamental problem of a severe housing and mortgage crisis.

The move also did not alter expectations about another policy rate cut of 50 basis points by the Fed.

On the domestic front, the Bank of Thailand's policy rate currently stands at 3.25 per cent.

The local rate mainly depends on pressures coming from higher oil prices that have already stoked serious inflationary pressures.

Economists had earlier predicted that the 1-day repurchase rate could be cut by 1.25 per cent.

But oil prices yesterday continued to spike, touching record highs of $109 per barrel.

Sethaput Suthiwart-Narueput, managing director of SCB Securities, said inflationary pressures remain strong.

The oil price rise will eventually affect the prices of non-fresh food as well as energy.

"Core inflation has gradually risen and it will fuel the price of various goods," he warned.

Sukit Udomsirikul of Siam City Securities said oil prices were putting pressure on inflation and also squeezing profit margins of companies.

Many firms cannot raise prices further because the government recently stepped in to curb a sharp rise in the prices of essential goods.

"The BOT does not need to slash policy interest rates in the face of high inflation. Moreover, the baht is starting to ease while the US dollar is expected to stabilise amid an expected rate cut," he said.

However, Standard Chartered Bank's senior economist Usara Wilaipich said the government's petrol price subsidy would partly reduce inflationary pressures and this may pave the way for the central bank to lower key interest rates.

According to DBS Group Research yesterday the latest US measures merely addresses the symptoms but not the cause of the US credit crunch, which is brought on by excesses in real estate speculation and an acute surge in money supply.

Like measures in the past, this exercise is seen as another attempt to buy time, experts warned.

Goldman Sachs said on Tuesday that "like earlier initiatives, the TSLF is incremental in nature and does not directly address the underlying credit issues of MBS (mortgaged-back securities) or materially improve the solvency of institutions holding large amounts of these securities".

"Because the TSLF has the potential to reduce the widening of spreads that has impeded the effectiveness of monetary easing, it probably reduces the likelihood of extremely large rate cuts in the near term, as suggested by today's market moves," it added.

Anoma Srisukkasem

The Nation