Caution with rates in these troubled times

Banks should hike interest rates judiciously - as increases could inflate the financial cost of doing business, the Bank of Thailand said yesterday, adding that it did not mean to put pressure on the banking system.

"We'll keep an eye on the interest rate adjustments of banks. The competition for deposits is intense but we want them to raise rates out of necessity," deputy governor Bandid Nijathaworn said.

The regulator wants commercial banks to raise interest rates based on actual requirements, depending on liquidity management. They should not increase rates more aggressively than the market can take, he said.

The latest round of rate lifting was understandable, as banks had to boost their deposit bases to support future credit growth after loans had expanded over the past few months. Deposits are the banks' main funding source.

Banks should be careful about the harsh impact from higher rates on businesses, but the real sector has shown it could adjust to the changing environment, he said.

Bangkok Bank, the country's biggest, last week forcefully sparked the latest round of rate adjustments by bumping up loan rates by 0.375 percentage point and deposit rates by 1 point. TMB Bank, Siam Commercial Bank, Kasikornbank and Krung Thai Bank soon followed.

The Monetary Policy Committee last month signalled that it might turn hawkish if inflation kept accelerating.

Inflation has also kicked off the latest bout of baht weakness, helping push the US dollar nearly 3 per cent higher versus the baht over the course of last month. A 7.6-per-cent rise in prices in May - the highest in 10 years - reinforced inflationary concerns.

Another round of central bank intervention yesterday helped the baht recover some ground lost recently but analysts see the currency drifting lower again in the next few weeks unless the political situation stabilises fast.

Foreign investors have been net sellers of shares and bonds over the past two weeks, pushing the baht on Monday to a five-month low against the US dollar.

The central bank said yesterday three to four offshore banks, including foreign banks and offshore branches of Thai banks, had been speculating on baht weakness. The economic picture has also become bleaker.

Thailand - an importer of oil and exporter of food, especially rice - has seen its trade balance deteriorate over the last few months, as energy prices have risen faster than food prices.

At the same time, the country's manufacturing base has been hit by the global economic slowdown.

"In this environment, the trend is your friend," ING said in a recent note. "We target USD/THB continuing to drift higher toward Bt34 over the next three months."

Assistant central bank governor Suchada Kirakul said the banking system was still liquid, as banks, particularly the large ones, were lenders in the money market with transactions amounting to Bt100 billion.

The banking system's loan-to-deposit ratio climbed to 99.36 per cent in April from 93.95 per cent in December, according to central bank data. That indicates excess liquidity was drained while banks were building up their commercial loan portfolios.

Bandid also noted that Thailand would complete the move to new accounting standard IAS39 by 2011.