• 
• 

Published on March 21, 2008

A 100-basis-point and possible wider gap between the Bank of Thailand's policy interest rate and the US federal funds rate will invite foreign portfolio funds into the Kingdom, exerting more pressure on the baht. The central bank's desire to dampen inflation will also provide more room for the baht to appreciate.

"When risk aversion likely wanes in the second quarter and there is a lack of a stronger BOT response to the US fed rate easing, we expect more offshore capital flows that would bode well for the baht," Jun Trinidad said in the note.

Citigroup forecasts the baht climbing to 29 next quarter, 28.50 in the third quarter and 28 in the fourth.

However, DBS Bank's Daily Breakfast Spread sees the unit depreciating from the current 31.20 level to 33 next quarter before recovering to 32, 30 and 31 in the third and fourth quarters this year and the first quarter of next. DBS expects the central bank to keep its policy rate at 3.25 per cent until the third quarter before hiking the one-day repurchase rate to 3.75 per cent and 4 per cent in the fourth quarter and the first quarter next year.

The Monetary Policy Committee will next meet on April 9, three weeks ahead of the Fed's meeting on April 30. The domestic policy interest rate is at 3.25 per cent, one percentage point above the fed funds' 2.25 per cent.

Atchana Waiquamdee, deputy central bank governor, has said the interest rate gap does not influence capital movements like in the past because of global liquidity, the credit crunch and risk appetite. "We can't conclude that the interest rate spread will lead to capital flows because the world has changed," she said.

Citigroup said it detected sizeable foreign direct investment while exporters continued to sell off the dollar, but in smaller transactions than last month before capital controls were lifted.

The central bank has said foreign funds are experienced in dealing in the bond market, while capital also can fly out of the country.

Citigroup said the central bank had stepped into the forex market to defend the baht at below 31.50. The currency strengthened to 31.14-31.15 after the Fed chopped its key rate by 75 basis points on Tuesday.

Oil importers also bought the dollar, while some Japanese banks acquired greenbacks on behalf of Japanese clients, possibly for repatriating profits back to Japan at the end of the fiscal year this month.

"Despite improving dollar demand, the demand pressure would ease but not reverse the market bias for a short dollar," Citigroup said.

Anoma Srisukkasem

The Nation