• 
• 

This year, such complaints have faded. The baht has weakened since March, and has been very stable over the past month. The central bank's massive foreigncurrency reserves, accumulated over the past two years, have enabled it to selectively inter¬vene in the market and reduce fluc¬tuations.

However, the Bank of Thailand has come under pressure on another front - its management of interest rates.

Last month, news in financial markets was dom¬inated by naysayers con¬cerned about the effects of high interest rates on growth, and sceptical on the ability of higher rates to control com¬modityled inflation.

The policy debate on rate hikes has coincided with receding inflation fears. Global crude prices have declined sharply, from over US$145 (Bt4,870) per barrel to under $125. Furthermore, the government has cut excise taxes on diesel and gasohol by Bt2 to Bt3 a litre. This should help slow the pace of inflation over the next few months.

Together, all these developments have led to a collapse in yields over the past month. Swap rates have declined by up to 1.5 per cent, while bond yields have gone down by nearly 1 per cent.

Uncertain global energy prices will remain a risk factor. The temporary nature of the excise cuts also raises the prospect that longerterm inflation pressures might not be tamed. Hence yields could remain volatile for now.

The environment is likely to con¬strain the central bank's ability to aggressively hike interest rates. We are expecting a further 50 basis points rise by yearend, taking the policy rate to 4 per cent - still significantly below expected average inflation this year of more than 7 per cent.

Last year, complaints about the central bank were rather unfair - the baht's appreciation was in line with other regional currencies. This year, we will see whether the bank's stew¬ardship of interest rates is similarly proved correct.