Market split on whether rates will fall or rise

Clearly, the Fed has shifted its stand from leaning towards preventing the economy from falling into recession to giving greater weight to combating inflation. Market participants are now divided into two camps: those who expect the Fed to keep the policy rate unchanged until next year; and those who believe it will start raising rates soon. It is very difficult for the Fed to implement its monetary policy in a situation where economic indicators show the economy is slowing and oil and food prices are at all-time highs.

In Thailand, the central bank is in the same boat. Recently, the governor sent signals to the market that the Bank of Thailand (BOT) would increase its benchmark rate soon, in order to control inflation. However, politicians want to maintain the rate, in order to prevent the economy from falling into recession. This issue was not the only sign of disagreement between policy-makers. Given the high inflation rates of recent months, we are in a negative real-interest-rate environment, which means returns from deposits are lower than inflation rates. Therefore, we believe the BOT will likely increase the benchmark rate at its next meeting on July 16. Market participants have already priced the expectation that the central bank will increase its benchmark rate. Sharp-eyed depositors would have noticed many banks started offering higher deposit rates, while government-bond yields had also shifted upwards.

On the currency front, the US dollar is holding firm against the due to a deterioration in the trade and current accounts. The latest reports indicate that Thailand registered a trade surplus of US$1.27 billion (Bt42.41 trillion) in May and a current-account deficit of $77 million for the same period.

Padej Piroonsit is head of treasury sales at BankThai.